Analyst Spotlight Archive

Analyst Spotlight: Bryan Keller

Analyzing the Impact of an Obama Presidency

Witnessing History
In a referendum on the status quo, and in a clear appeal from the voters for real (or perceived) change, Barack Obama has been elected the 44th President of the United States. President-Elect Obama is the first Democratic president to win more than 50.1% of the popular vote since President Lyndon Johnson in 1964. Voter turnout was estimated to be as high as 131 million, or about 64.1%, of eligible voters, the most since 1960.

Though the outcome of this historic election was not necessarily a surprise, the election of an African-American to the highest public office is unquestionably a monumental achievement for this country, and further evidence of the advancement that has occurred in the racial and cultural landscape of our nation. Irrespective of one's political or policy views, it is a feat we should all be proud of.

On the minds of many individual investors the day after is, "Now that the election is over, what does it mean for my investment portfolio?"

This question is not one that is unfamiliar to us, as we've written articles, made multiple presentations to clients, and hosted E*Trade Web Seminars proactively discussing the matter for many months. That said, the question is also not one that is easily answered, as there are many moving and interconnected puzzle pieces that will not come into focus for weeks and months to come. Furthermore, politics is only one piece of an even larger puzzle that helps to construct our ultimate investment outlook. To say that it is unwise to shape one's investment portfolio around the outcome and expectations of elections and political activities would be an understatement.

Though not all precincts have been fully tallied, the most recent read on the election shows Obama achieving 52.3% of the popular vote, versus 46.4% for his Republican counterpart, John McCain. Viewed from the state Electoral College tallies as of Wednesday (state representatives who officially select the Presidential ticket based on their respective states popular vote), Obama obtained 349 electoral votes against McCain's 163. The candidate to reach 270 total electoral votes wins.

Additionally, something investors may want to keep an eye on, is the House and Senate Democrats. House Democrats increased their majority from 232 to 252 representatives, while Senate Democrats strengthened their hold on the Senate by increasing their roster from 51 to 55 as of this writing, which gives them a clear majority. With a Democrat President, House and Senate, the passage of legislation supported by this party should pass more easily. Historically speaking, the market prefers a more gridlocked Washington.

Despite our ultimate view that the individual sitting in the Oval Office has a much lessened ability to shape and control the many moving parts of the country, economy and geopolitical events than most give them credit for, there are a few key questions and issues that we will be paying close attention to as we count down the remaining 75 days to Obama's inauguration, and beyond.

Welcome Home! Your House Is On Fire
President Obama will be warmly welcomed into his first day in the Oval Office facing a number of daunting issues. And you thought your Monday mornings were rough!

Rather than speculate, throw darts and attempt to guess what will happen, we prefer to outline and frame the issues in an attempt to provide ourselves with a framework in which to better answer the questions, as more information is made available. Let's take a look at a few of the key issues:

• Economy
  
  • The stabilization of the "Main Street Economy" will surely be first and foremost on the mind of the new Obama Administration. Look for middle class friendly tax breaks and stimulus packages to move quickly through Congress, potentially even before the official transition occurs.
    
  • Details and timeframes of potential middle-class friendly changes to the tax code, and stimulus packages are still fluid and evolving. Regretfully (or, realistically), Obama will not have the firepower that President Bush had in his treasury back in the first quarter to issue rebate checks to individuals. We're not saying that it won't happen, just that it will be more difficult to achieve given the recent debt burden our Government has taken on in recent months in an attempt to quell the fires in the financial market.
    
• Stability of the Financial Markets
  
  • Though this issue will evolve in a relatively independent manner from the change in guard occurring in Washington, the expectation that its progress will be sped up due to pressure from the incoming Obama Administration and Democrat led Congress is likely.
    
  • Look for Obama to quickly announce a new Treasury Secretary (for your own entertainment, go here to pick one!). Names of candidates that have floated to the top of the list in recent weeks include Lawrence Summers (former Treasury Secretary under Clinton) and Tim Geithner (President, Federal Reserve Bank of New York). Former Fed Chairman Paul Volcker's name has also been whispered.
    
  • The announcement of an experienced Secretary who the market sees as credible and decisive, will undoubtedly have a positive effect.
    
• Unemployment
  
  • The US unemployment rate has risen from 4.5% in March 2007, to a current rate of 6.1% -- many economists expect this rate to increase going forward as more and more firms slim down their ranks.
    
  • Though many headlines of recent layoffs have been focused to those on Wall Street, there is an expectation that this will spread to non-financial sectors as well.
    
  • Part of a pending stimulus package could involve expanded unemployment benefits and increased job training resources, just to name a few.
    
• Tax Code Changes?
  
  • In our view, this issue has been wildly miscalculated.
    
  • The "Bush Tax Cuts" are set to expire at the end of 2010. The new and full Democratic majority could easily sunset these early -- January 21st, 2009 if they wanted.
    
  • It's our opinion that, given the currently poor and difficult economic environment, President Obama will take a slight step back and insert some wiggle room for himself in terms of the exact timeframe of implementation for his tax plan. Many experts do not believe that increasing taxes -- on any individual -- during a recession is good policy.
    
  • Obama may circumvent his "tax cut" proposal be providing stimulus directly to middle class families and individuals -- again, details and timeline are forthcoming.
    
• Potential Stimulus Packages
  
  • As mentioned earlier, the options which the new Administration will have to work with are far more limited than the options of the outgoing Administration due to recent market turmoil and the extreme levels of government intervention.
    
  • Expect particular emphasis to be placed on the following areas if and when a stimulus package were to occur:
    
  • Infrastructure -- rebuilding and creation of roads, bridges and energy infrastructure projects
    
  • Alternative Energy -- special tax breaks and incentives for Wind, Solar and Ethanol (Nuclear Power probably won't fair as well with a McCain defeat)
    
  • Increased spending on unemployment benefits and food stamps, as well as funds to support Medicare and Medicaid
    
• Announcement of Obama Cabinet
  
  • Also mentioned earlier, the market will closely be watching the individuals which are appointed to the Obama Cabinet.
    
  • Most important at this time is the Treasury Secretary -- expect quick movement on this front.
    
  • Secretary of State, Secretary of Defense and Secretary of Energy are other key appointments to watch.
    
  • For a glimpse into the individuals being considered, click through to this article from the Wall Street Journal (subscription may be required).

A Tail of Two Winds
As we attempt to put this framework into place, it is also paramount to keep in mind some of the other key factors which have a more direct impact on the markets. Here are some of the positive tailwinds for the market:

• Favorable market valuations
  
• Year-end seasonality is currently a positive for the market
  
• Our current position within the Presidential Cycle has been historically positive
  
• Historically low investor sentiment (bearish) -- a bullish contrarian signal

• Unwinding of the credit markets
  
• De-levering of the consumer (and some corporate) balance sheets
  
• Attempting to regain the confidence in our financial industry and markets
  
• Improving the US's relationship with the rest of the world

Question is, which winds will blow the strongest?

We also need to remind ourselves of the two key drivers of an individual investor's portfolio: fear and greed. The oft-quoted Warren Buffettism, "be fearful when investors are greedy, and greedy when investors are fearful" rings more true today than at any time in recent memory.

We've made multiple attempts to more decisively and scientifically portray how fear and greed hurt investor performance by analyzing fund flows into domestic equity mutual funds, by looking at the cost of emotional investing, and studying the benefits of maintaining a balanced and diversified portfolio.

The Jimmie Johnson Investment Strategy
I don't profess to be much of a NASCAR fan, but it has always amazed me how, upon a multi-car collision and pileup, drivers in the midst of it all will continue to plow straight ahead at 200 miles per hour. But when put in the context of today's market and an individual's portfolio, it makes sense for that to be your best strategy.

To weave in another sport analogy -- for most individual investors, the current environment is 4th and 1 yard and down six points on the opponent's goal line, or 3 balls and 2 strikes in the bottom of the ninth, tied with a runner on third.

It's clutch time in this crisis of confidence.

This is the period of time where your next move can shift your retirement five years forward or backward, or determine whether you're able to fund your child's education partially, or fully, when she heads to college in 18 years. Historical data suggest that many individuals will -- or have already -- react(ed) emotionally, stealing away precious basis points and compounding (pun intended) the negative implications of being out of the market, or chasing the performance of the last hot asset class.

In the absence of clarity and in the midst of volatility, we believe the most important consideration for an individual investor is to adhere to the time tested strategy of diversification. Sure, there have been a lot of "car crashes" occurring all around us in recent weeks. And though it may not feel like the right thing to do, staying the course through turbulent times, and maintaining a balanced and diversified portfolio, is the right action to take. Only then will you be able to safely plow straight ahead.

-- Bryan Keller, Research Analyst