Obama and the fear factor
How much does Wall Street really fear Barack Obama?
And what are investors in general supposed to think, and do, about their portfolios with Obama coming to power?
The battered stock market kicked off this week looking hopeful. On Tuesday, as Obama seemed all but assured of winning the White House, the Standard & Poor’s 500 index jumped 4.1%.
That was followed on Wednesday and Thursday by the worst two-day decline of this year-old bear market, slashing 10% off the S&P.;
Welcome, Mr. President-elect!
On Friday, after Obama’s first post-election news conference, the S&P; finished the day with a gain of 2.9%.
But did stocks’ swings this week have anything at all to do with Obama? Racked by the credit crisis and the growing likelihood of a deep recession, financial markets have been given to extremes for the last two months, mostly to the downside. The presidential race added to the uncertainty, but it never was the main driver of this market turmoil.
Obama’s supporters believe he has the solutions needed to get the economy growing again. Stabilize the financial system and fix the economy, and the stock market should respond positively -- right?
But plenty of people believe Obama’s ideas will be somewhere between hurtful and ruinous for investors over time.
Tom Kerr, who helps manage $2.5 billion in stocks for Reed, Conner & Birdwell Inc. in L.A., asserts that many of the policies Obama has espoused are “job destroyers and are bad for all size businesses in America.”
He ticks off his list: “Less free trade . . . more business regulation . . . increased union power . . . higher tax rates on big consumer spenders.”
Kerr also notes that Obama has proposed a windfall-profits tax on oil companies. Kerr suspects Obama would start with Big Oil, then move to boost taxes on other industries -- say, the big drug companies.
Obama’s image with investors such as Kerr wasn’t helped by the Illinois senator’s comments, in the famous exchange with Joe the Plumber, about wanting to “spread the wealth around.”
“Socialist!” the Republicans screamed. In America, that word is a guaranteed spine-chiller for the richest of the investor class, and even for the not so richest.
Any of the well-heeled who need an excuse to sell stocks now, even with the S&P; 500 down 40% from its 2007 peak, can cite another Obama promise: his plan to hike the maximum tax on long-term capital gains and dividends to 20% from 15% for couples earning more than $250,000 a year.
Let’s do the math. You’ve got a $200,000 long-term stock gain to cash in. At a 15% tax rate, you’d keep $170,000 of that. At a 20% tax rate, you’d keep $160,000.
But what if the stock is 25% higher a year from now because the economy is coming out of recession, thanks to -- or in spite of -- Obama’s policies? If your long-term gain is $250,000 a year from now, and the tax rate is 20%, your net gain would be $200,000.
Giles Almond, who manages $155 million for clients as head of Matrix Wealth Advisors in Charlotte, N.C., says most of his investors are taking a practical view of Obama.
“The gist of what I hear is, ‘Let’s wait and see,’ ” Almond said. “People know that any politician doesn’t end up implementing more than a fraction of what they intend to do.”
Almond, who said he didn’t vote for Obama, recalled that “there was a similar level of apprehension when Bill Clinton came to office.” Whatever else Clinton did, he wasn’t bad for stocks in the ‘90s.
Many analysts predict that Obama’s focus in 2009 will have to be stimulating the economy and avoiding moves that could deepen the recession.
All things considered, the stock market should like the idea of more fiscal stimulus. And that spending may eat up resources that otherwise would fund the Obama agenda that some investors fear.
“Some [ideas], like universal healthcare, may be temporarily constrained by their large budget impacts,” Bank of America economists wrote in a post-election report. “Others, like higher taxes on higher-income households, capital gains and dividends, likely will be delayed until the economy improves.”
There is, however, the potential for the new Democratic majority in Congress to push Obama more toward the kind of government-engineered “wealth spreading” that could be a long-term drag on entrepreneurship and investment.
Yet even if Obama and Congress aggressively pursue a classic liberal agenda, it’s silly to think that would leave the stock market devoid of opportunities.
When the economy recovers -- as I said, either because of or in spite of Obama -- many stocks will respond accordingly.
Even with his misgivings about Obama, Kerr says some stocks already are too cheap to ignore. His list includes media giant Time Warner Inc. and banking titan JPMorgan Chase & Co.
In the meantime, some investors are going with what may be a fail-safe approach in preparing their portfolios for Obama. They’re buying tax-free municipal bonds.
Muni yields of, say, 4% or higher are attractive on their own merit for many investors, but they’ll become more attractive if tax rates rise, notes Rick Keller, head of Keller Financial Group in Irvine.
“I think we’ll inevitably see higher tax rates down the road,” he says.