Obama faces tough test

Barack Obama’s victory in the U.S. presidential election on Tuesday has been heralded as a turning point in history. The long, hard-fought campaign may soon seem like a vacation, though, as the president-elect gets to work on solving the problems of a country that’s had no shortage of calamities.

The first priority will be to sort out the economic train wreck.

“The election really is trumped in this instance by the economy, which is to say that I didn’t really think the result of the election would influence the stock market one way or the other, except to the extent that you eliminate some uncertainty, and maybe that’s why the market has rallied in recent days,” says Fritz Meyer, senior market strategist for Invesco AIM, the American sister company of Canada’s Invesco Trimark.

He says that the fundamental drivers of the current economic situation are so strong that the cycle will have to take its own course.

Meyer says the Obama administration will not likely try to push any tax hikes through Congress any time soon, as members of the legislative branch will be reluctant to pass such a measure before the economy starts to improve. Protectionist promises to reopen trade agreements are also likely to fall from the list of priorities.

“I think the general perception that higher taxes are not a good idea, compared to lower taxes, is correct, but I’m not too negative on that,” Meyer says. “The marginal increase in taxes that was proposed in the campaign is not a show-stopper. We had those rates under the Clinton administration and we had pretty decent economic growth.”

In fact, he says the administration will more likely propose another stimulus package.

“The election has come and gone and I think its effects will be de minimis on the markets for the time being,” Meyer says. “At the same time, I think the market has bottomed…[but] obviously there are no guarantees.”

“The credit crisis is so large, and looms over anything politicians could do, that the course for the economy will be dependent on the results of the unfreezing activities on the part of the Treasury and the Fed.”

He says the policy initiatives that are already in place are slowly having an effect, and that the U.S. economy will likely emerge from the downturn ahead of Europe. Emerging markets should hold up well, but the pace of growth will be moderate.

The recent spike in the volatility index took the VIX to a reading nearly double its historic levels, which Meyer says suggests “this probably was the mother of all panic selling indicators. I suspect that did mark the market bottom.”

The Feel-good factor

According to Donald Coxe, global portfolio strategist at BMO Financial Group, Obama’s election as president will lead to a “feel-good attitude” within America at a time when doom and gloom is pervasive.

Based out of Chicago — the headquarters of Obama’s victory party — Coxe suggests that Obama’s election is the equivalent of Pierre Elliott Trudeau’s victory in 1968, “when a wave of optimism swept the country.”

Unlike Trudeau, though, Obama is faced with a domestic recession and two foreign wars, which will dictate his priorities. But it’s a “list of priorities [that] will probably suit Canadians,” says Coxe.

Obama’s initial focus will be on implementing policies to enable banking stocks and the U.S. stock market to rebound, explains Coxe. “This is essential, as a stock market rally is a precursor to the end of the [U.S.] recession.”

Yet because of the economy, he has “very little room to maneuver,” says Coxe. “What we can expect is a fall in the U.S. dollar. The Canadian dollar — clobbered over the last few weeks — will head back to par, prompting winners and losers.”

Coxe does question whether or not some of Obama’s more strident comments — such as calling for the dismantling of NAFTA — will gain any ground. This includes whether or not he will be able to make good on his promise to close any new coal-fired electrical generating plants under the weight of carbon taxes.

“This type of legislation gets very complicated,” he says, “and can get bottled up in house committee.” Instead, Coxe chalks up these electoral promises to “rhetorical flourish.” He adds, “I’d be surprised if they did anything more than move in that direction.”

What electors will see, however, is Obama supporting the ethanol lobbyists that helped him get elected, says Coxe. During his campaign, Obama promised a $150 billion budget for alternative fuels, says Coxe, while “McCain was the only politician to expose the folly of ethanol, which is why he barely ran a campaign in Iowa.

“If you recall, Obama started his [democratic leadership] campaign in Iowa, beating out Hillary Clinton in a state with almost no African-Americans. So Obama owes the ethanol lobby and they will continue to get love and attention from the White House.” Iowa is the second-largest producer of corn, the base commodity used by the U.S. to produce ethanol.

“If McCain won, there would be no help for the ethanol producers and there would be a lower price for corn and grains, which would reduce the upward pressure on food.”

Coxe still believes that once the financial crisis is sorted, the world will return its focus on the global food shortage.

“Remember that he managed to win the election because of the stock market crash and the banking crisis. There was a tie between him and McCain when the crash occurred and Obama moved ahead with a six-point lead because Wall Street is considered a Republican preserve,” says Coxe. “The man has been lucky all his life.”

Filed by Steven Lamb, steven.lamb@advisor.rogers.com and Romana King romana.king@advisor.rogers.com

(11/05/08)