With today being the day when Barack Obama will take office as the 44th President of the United States – and historically, the first president we have asked our global economists to give us a summary of some of the challenges the new president will have.
The 44th president of the United States will inherit some tough challenges when he is sworn into office today. But since his election victory, Barack Obama has moved swiftly to put the tools in place to promote economic growth – good news for investors in US equities.
Despite his assertion that there is “only one president at a time,” Mr Obama hit the ground running after his November election win, and has moved quickly to put the tools in place for swift action on the economy.
Last week, the Democratic Party unveiled its much-anticipated USD 825 billion stimulus plan, a package of tax cuts and public spending designed to stem the economic slide and kickstart growth. Mr Obama said the plan, which he is keen to see passed before Congress goes into recess in mid-February, aims to save or create up to 4 million jobs.
In addition, Mr Obama has successfully lobbied Congress for the release of the second half of the USD 700 billion set aside by the Troubled Asset Relief Program (TARP), avoiding a potentially messy battle in the first few weeks of his administration. Lawmakers criticised the Bush administration’s use of the first half of the funds, citing the lack of transparency and lack of conditions attached to bank aid, but Obama’s team have provided assurances that these concerns will be addressed.
The “who’s who” list of choices to fill key positions in Mr Obama’s cabinet has also generated positive marks. Among the appointments are Hillary Clinton as secretary of state and Timothy Geithner, the former president and CEO of the New York Federal Reserve, as treasury secretary. Other economic hard-hitters in the team include Lawrence Summers, former treasury secretary in Bill Clinton’s administration, and Paul Volcker, a former Fed chairman.
Consequences for investors
For investors considering increasing their allocation to US equities, all this may be good news. Valuations are becoming extremely attractive by many measures, with price/earnings ratios near historic lows, but the market has remained highly volatile. For a sustainable equity rally, investor sentiment undoubtedly needs to improve.
A change in leadership from the Bush administration, with its historic-low approval ratings, to a new Obama administration with a focus on change, has led many Americans and non-Americans alike to feel a new optimism. This may be just the catalyst the market needs, particularly if leading economic indicators begin to bottom out during the spring. The swift progress through Congress of Mr Obama’s stimulus package should also have far-reaching effects for the economy and for US businesses, with infrastructure, clean energy and technology companies among those set to gain.
While it is difficult, if not impossible, to predict when the economy will begin to stabilise and eventually grow again, it is worth remembering that markets typically recover well ahead of the economy. In addition, many economists and market strategists are predicting the US will be the first economy to recover due to the speed and extent of the actions taken by US authorities relative to the rest of the world.
These steps appear to have succeeded in avoiding the event investors most feared in autumn 2008: a total collapse of the financial system. Whether they will succeed in bringing the US out of recession is another question; however, we are now, at least, in more familiar territory, compared to the extremely uncertain future we faced only four months ago.
Moreover, the US equity market has historically generated strong returns after downturns