Barack Obama’s historic election victory is likely to see the US shift towards more interventionist economic policies, a more progressive approach to the environment and a less unilateralist foreign policy.
The AMP’s Dr Shane Oliver believes that we are also likely to see an even more aggressive approach to dealing with the financial and economic crisis now gripping the US.
"With economic policy under Obama likely to be pragmatic and Obama offering a breath of fresh air after the troubles of recent years there is no reason that the new US administration will be negative for shares, and if anything it is likely to be positive."
He says it’s worth noting that US shares normally do better under Democrat presidents than under Republicans.
In an historic election Barack Obama has won the US presidency on a platform of change.
While an Obama presidency will step back from the pro-business, almost laissez-faire, neo conservative approach of the Bush Administration, an extreme lurch to the left is unlikely.
Rather, Barack Obama is likely to prove pragmatic much as President Clinton was.
Key aspects of an Obama administration are likely to be:
• A new fiscal stimulus package, much larger than that seen earlier this year, is likely to be enacted early next year. Although given the US Government’s already huge borrowing program (reflecting the existing deficit plus numerous measures to deal with the current crisis) Osama’s scope to stimulate is limited somewhat.
• More active Government intervention to prevent home foreclosures and increase bank lending, particularly by banks receiving government assistance.
• Tax cuts focused on low and middle income earners, but tax increases for high income earners (back to pre- Bush top marginal tax rates).
• An increase in tax rates on dividends and capital gains from 15%, but possibly only to a top rate of 20%.
• Increased regulation of business, particularly the financial sector. (This is inevitable in most countries after the current crisis.)
• Increased government spending in areas like health, education and infrastructure.
• A commitment to free trade, but more incentives for US companies to create jobs in the US.
• More concern about the environment and introduction of a carbon emissions reduction scheme.
• A more multilateral approach to the “war or terror” and to foreign policy generally.
It’s also worth noting that the Democrats’ increased majorities in both Congress and the Senate put President-elect Obama in a good position to implement his policies.
It will also enable the US Government to have a more decisive approach to dealing with current financial and economic challenges in contrast to the debacle seen in late September/early October in trying to pass the bank rescue program.
Investor reaction
The conventional view is that a Democrat victory would be negative for shares (via higher taxes and more regulation).
For example, in a recent survey only 17% of US investors though that a Democrat victory would be positive for profits compared to 55% who thought that a McCain victory would be positive and 54% of investors thought that shares would fall in November and December if Obama won compared to only 14% who thought shares would fall if McCain won.
The statistical evidence suggests that US shares do better in the year after an election when an incumbent Republican party wins, as opposed to when an incumbent Republican party loses.
However, the difference is not all that great.
There is also some evidence based on data over the last century that US shares do better between election day and year end when a Republican president is elected.
However, there are several points to note regarding all this.
Firstly, this year’s presidential election has been a side show with shares plunging in response to the turmoil that the US sub-prime mortgage crisis has caused.
This is very different to the broadly sideways range trading that prevailed in the run-up to the last two elections when incumbent Republicans lost to Democrat candidates in 1976 and 1992.
See the next chart, which shows US share prices as measured by the S&P 500 from 1 year before till 6 months after US elections from 1976.
Given the scale of the problem now facing the US, it’s likely that developments in relation to the credit crisis will continue to dominate politics in terms of share market impact.
In the short term, shares are still very oversold and so they might bounce further regardless of the election outcome.
And getting the election out of the way may also help.
Secondly, the chart above indicates that a Democrat victory doesn’t necessarily mean a bad outlook for the market.
After the 1976 Carter victory over a Republican incumbent shares performed below par in the aftermath of the election but shares did better than normal after Clinton’s 1992 victory.
Thirdly, it’s possible that a change of Government in the US will be welcomed by investors.
The Bush Administration has lost credibility after having prevailed over two bear markets, two recessions, a big policy failure with the sub-prime mortgage debacle and become bogged down in Iraq.
In the post war era, this track record is only on a par with that of Richard Nixon. This loss of credibility may have harmed the US Government’s ability to deal successfully with the recent financial turmoil.
So having a change in direction to the Democrats may be seen
