What Obama Means for the Stock Market

Written by Dave Young, president

photo by Bohphoto

When Barack Obama began his race for the White House his rally cry was to get us out of Iraq as soon as possible. That morphed into a call for change from the Bush policies of the previous eight years. Finally, right before the election it moved towards fixing our economy.

If the President Elect does what he originally campaigned on, then some of his pro-regulation, pro-tax policies could damage our economy over the long-term. 

During his campaign he spoke about how important it was to tax those deemed rich, while slightly lowering taxes for everyone else.

Editorials in the Wall Street Journal claim his plan would have a marginal tax bracket of 62%, with all taxes taken into account, on income over $250,000. 

Increased taxes translate into government removing money from the marketplace and then deciding where to reallocate it. This diminishes savings, investments and job creation.

Historically, government reallocation of those funds benefit certain interest groups, but doesn't benefit the broad economy. This negative wealth transfer effectively mutes economic growth.

Historically, when democrats take the white house, the market usually does better than under republicans. 

Usually going into an election, if a democrat is winning, Wall Street expects the worst, and the market sells off in advance. After the democrat gets into office, then Wall Street realizes they aren't going to do what they promised, breathes a sigh of relief, and then the market rallies. The wild card is whether or not Obama will implement what he campaigned.

His most recent statements about the economy give the impression he will promote clean energy, infrastructure and education. If so, stocks in those sectors should benefit. 

We know health care is going to be impacted. It's too early to tell if it will be a positive or negative impact. Previous attempts to socialize medicine were met with health care stocks declining.

So far, the markets have followed their historical election pattern. 

The difference this time was the magnitude of the decline. This year's decline was the worst ever to precede an election. If the market continues to follow historical patterns, then 2009 should be a strong year for the market.

After a decline this severe, I believe it is most important to select those sectors that usually generate the highest returns during a recovery. It is easier and more predictable to pick those sectors than to guess what Obama is actually going to do. 

The average recession lasts 11 months with the shortest being 6 months and the longest being 16. 

This current recession is now 12 months long. The stock market tends to recover three to four months before the recession ends. 

Following previous recessions, the strongest sectors (in order of strength) were Consumer Discretionary, Information Technology, Financials, Industrials, Materials and Consumer Staples. The weakest sectors (in order of weakness) were Utilities, Telecomm, Energy and Health Care. For many, the critical decision is between being conservative or growth oriented over the next eight years. 

Looking forward investors can:

--Invest in money market funds; bank CD's, fixed annuities or treasury bonds. These will guarantee returns in the 2-4% range. Depending on the product, your money is locked up at historically low rates for three to seven years.

--Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. This portfolio should be positioned in the sectors mentioned above to capitalize on areas of the market that historically recover the fastest. This panic has pushed stocks down to the same levels they were 11 years ago. 

We do know that returns after previous bear markets have been exceptional.

Most importantly, investors should reallocate their portfolios based on opportunities going forward. Looking backwards or following a "rear view mirror" investing strategy usually causes an investor to invest at the wrong place at the wrong time. 

Feel free to leave comments or contact us if you have questions or concerns. We can be reached at 801-375-2500.