President-elect Obama and the new Democratic Congress might not have an easy time enacting proposed changes in the troubled economy, according to Robert Doll, vice chairman and global chief investment officer of equities at BlackRock, Inc.
“We believe the U.S. economy is in a potentially significant recession and recovery will be slow in the coming year,’ Doll said, in a press release. “Governments are like households—when money is tight, new spending gets close scrutiny. Simply put, it doesn’t appear that there is enough money available to enact every new program Mr. Obama has been proposing.’
Doll said he believes the election’s market impact will be less than many observers predict, but he does think actions by President Obama and the Congress could have important implications for how investors position portfolios.
Doll noted that the Obama administration’s flexibility will likely be limited by the massive scale of federal programs enacted in response to the global financial crisis—including the recapitalization of the banking system, nationalizing financial institutions, insuring deposits, and the governments purchase of equity stakes in the nation’s banking system. “Mr. Obama surely would have preferred the opportunity to shape these plans himself,’ Doll said. “Nevertheless, he will most likely have the chance to put his own mark on fiscal stimulus measures.’
Tax Increases Unlikely Next Year
Although Obama made tax policies a centerpiece of his campaign, Doll doesn’t predict tax increases will be as immediately drastic as some fear.
If the proposed tax increases are eventually enacted, however, it could have an impact on investors. Obama proposed higher marginal tax rates for individuals in the highest tax brackets and reductions for those in the lowest. Obama also has indicated he would like to eliminate the favorable tax treatment of long-term capital gains and qualifying dividends (the 15% tax rate is set to expire in 2010). The higher tax rates for investors could be a headwind for equities in the years ahead, Doll predicted.
But Doll doesn’t foresee significant tax increases amid the economic turmoil of 2009, he said. “With the economy in recession, we think the government will be forced to borrow more money and to increase tax rates simply to keep itself running,’ Doll said. “However, while tax rates will likely climb during President Obama’s administration, the increases are not likely to be as steep or as sudden as many fear.’
Doll pointed out that municipals are one of the few areas of the market that should benefit from increased taxation. “As tax obligations increase, the tax-exempt nature of municipal bonds becomes more attractive to more investors,’ he said. “This should help municipal bonds perform well relative to other market sectors.’
The Hindrance of Unity
Doll said equity markets tend to underperform when Congress and the White House are occupied by the same political party. “If history is any guide, “unified government’ could pose a minor, but not serious hurdle for equities for at least the next two to four years,’ he said.
There could be upswings for some markets under an Obama administration. Doll said traditional manufacturing industries, construction, and alternative energy are among the market sectors that could benefit. “Mr. Obama’s potential trade policies may benefit traditional American manufacturing industries,’ Doll said. “However, protectionist policies are, on balance, equity-negative, run the risk of slowing overall economic growth and can add to inflation concerns via wage pressures.’
Obama’s emphasis on infrastructure improvements and being “green friendly’ could be a boon for construction-related companies and alternative energy companies—but maybe not good news for traditional energy companies, according to Doll.
Health Care Policy
Universal health care has been a key pillar of the Obama campaign. “It is difficult to predict exactly what impact his plans might have, but there is a general sense that managed care companies would face increased costs under his initiatives,’ Doll said.
Similar to Obama’s tax proposals, Doll doesn’t expect proposed health care changes from the Obama administration to affect the markets in the short term. Obama’s health care program would provide low-income Americans with subsidies to purchase health insurance, but Doll expects the administration will amend some of its plans in light of budgetary limitations.
Overall, it might be good that the election has passed. Doll said the election has removed, at least for now, the “uncertainly effect’ that has hung over the markets for the past two years. “Since the 2006 mid-term elections, there has been intense focus on this election and, as a rule, markets loathe uncertainty,’ he said. “At the least, uncertainty over the election outcome has now vanished from the list of negatives impacting the markets.’
