The GDP of a nation measures its consumption, investment, trade exports minus imports, and government spending. Given that the first three of these measurements are not doing particularly well for the US at the moment, government spending is going to have critical importance for the economy and the markets. When Barack Obama takes office, there will obviously be a fundamental shift in the priorities of government spending. In the second presidential debate with John McCain, Obama ranked his priorities: (1) Alternative Energy (2) Health care (3) Education. In the short term, he has promised to pass a multi-billion dollar stimulus package that will include numerous construction projects. It likely, however, that the market has already anticipated most the stimulus plan’s effects. The Dow is up almost 20% from its November 20, 2008 low, while construction related stocks like John Deere tractors (DE ) and Caterpillar (CAT ), a company that produces construction equipment, have already seen gains of over 40% since the market reached its lows.
Anticipating the effects and the companies involved in the effects of Obama’s healthcare or energy policies will be more difficult, especially because “fixing the economy” is going to put everything on the back burner, possibly indefinitely. Given that, if one is optimistic that the economy is going to recover somewhat in the next year, it may be safest to invest in stocks that are only undervalued because of the overall poor economy. Google (GOOG ), for example, which relies to a large extent on companies that can afford to buy advertising from them, has seen about half of its value disappear in the last year. Amazon.com (AMZN ) has seen a significant decline over the year even though 2008 was its best year ever . Given the volatility of investing in a rocky market, and the particular volatility in tech stocks, it may best try to minimize risk by investing in a mutual fund. The Fidelity Contrafund (FCNTX ), for example, focuses on stocks it sees as undervalued, many of them tech related.
A more specific policy related example of how President Obama could affect the market can be seen from the perspective of Wal-Mart (WMT ), the nation’s largest private employer. Democratic leaders in congress have vowed to pass the Employee Free Choice Act, which would make it far easier for employees to form unions, something Wal-Mart has spent millions of dollars in lobbying money trying to avoid. If Obama signs the Employee Free Choice Act into law, look for that stock to underperform, at least in the short term.
Another example of a quick policy change that Obama plans to enact is federal funding for embryonic stem cell research . Biotech companies involved in stem cell research such as Stem Cell Inc (STEM ) experienced a spike immediately following Obama’s election, and then shed most of the gains in the following two months. Another spike is likely to occur once Obama and the Democratic-controlled congress actually pass the bill.
Bottom Line: While we don’t know everything that the Obama administration will do or its effects on the markets, there are some subsections of the market that will be inevitably affected more than others.
Note: I initially wrote this article under a different byline here .