How to invest in Obamanomics

Obama's first State of the Union gives investors a clue on what's in store for 2010

Jeremy Glaser 02.02.2010
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Looking back on the 2009 investing landscape it's clear that government policy played a vital role in driving the market. The bank stress tests, energy legislation, health-care reform, the stimulus, and myriad other regulations alternatively gave the market heartburn and bouts of euphoria. Following the machinations in Washington became increasingly important for investors.

Even though the economy has stabilised, the actions that government takes, or doesn't take, during the coming months will still have a tremendous impact on stocks. This made President Obama's first State of the Union address on Wednesday particularly meaningful to the investment community.

His top priority for 2010 is jobs. No surprise here. One of the most striking parts of the recovery so far is that even as output has begun to rise off previous lows, job numbers continue to linger in the basement. Firms are doing more with less, and fear of a double-dip recession has kept hiring at a bare minimum. Employment in especially hard-hit industries such as construction remains decimated.

The administration's short-term answer to this problem is a new jobs bill that Obama hopes will quickly work its way through Congress. The exact details of this package are unknown and likely to change radically, but they are also likely to include tax breaks for hiring new workers and potentially new money for stimulus-related construction projects. Depending on the structure, the tax breaks may be targeted toward small business, meaning that many publicly traded companies will not see a big tax savings as they begin to return to full employment.

The administration's short-term answer to this problem is a new jobs bill that Obama hopes will quickly work its way through Congress. The exact details of this package are unknown and likely to change radically, but they are also likely to include tax breaks for hiring new workers and potentially new money for stimulus-related construction projects. Depending on the structure, the tax breaks may be targeted toward small business, meaning that many publicly traded companies will not see a big tax savings as they begin to return to full employment.

Any further infrastructure spending could have a positive impact on a number of companies. Large conglomerates like General Electric and Siemens have huge infrastructure exposure. Caterpillar could see a rise in orders for construction equipment, and there will be more demand for concrete and other basic materials from firms like Cemex.

Clean energy continues to be on the radar screen. It's not clear how much new money is being promised for investment in solar, wind, and other alternative sources, but developing these sources is clearly a path to which the government is committed. This could help firms like SunPower. The discussion around the potential to enact cap-and-trade legislation to combat climate change was brief, and, given the logjam in the Senate, it doesn't seem like a robust cap-and-trade or carbon tax proposal will see the light of day this year.

One intriguing note was Obama's support of the expansion of nuclear energy, something that has been opposed by some Democrats in the past. At first glance, dominant players in the existing nuclear industry like Exelon would be poised to benefit the most from federal subsidies to build new plants.

Another large plank of Obama's agenda for the coming year is banking reform. The president said in no uncertain terms that he will veto any reform legislation that does not go far enough to reduce systemic risk. As we've discussed before, the shape of banking legislation could take any number of paths from small superficial changes, to major overhauls of the entire regulatory structure. It looks like Obama is ready to take on the banking lobby and Congress to tilt the legislation toward larger reforms. This is likely bad news for the big banks like Citigroup, JP Morgan, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs that will likely face tougher restrictions on what they can and cannot do. Smaller and regional banks, which are less likely to have large investment banking or trading operations, will see a small impact to their bottom lines.

Obama wants to make access to higher education a priority so that American workers can compete in the global information economy. He proposed changes to the student loan system making it less onerous for students. They would only be required to pay up to 10% of their income to service loans, and all outstanding debt would be forgiven after 20 years of payments.

Making college more accessible is a lofty goal, but the traditional education system hasn't expanded enough to teach all of these new students. Instead, there is likely to be a further move to for-profit education. Throughout the recession, schools like Strayer, Apollo Group's University of Phoenix, and DeVry have reported increasing enrollment (and profit) as students sought to sharpen their skill set. Better loan terms could feasibly accelerate this growth.

Last, but certainly not least, health-care reform was again a heated topic of discussion. More ink has been spilled over this topic both here at Morningstar and elsewhere than almost any other reform proposal during the last year. The election of Scott Brown in Massachusetts to fill the vacant Senate seat took the chance of passing a bill from near 100% to closer to a 50-50 shot. Obama used the State of the Union to implore Congress not to give up on reform and to try and work out a compromise.

No one knows what that compromise might look like. But our health-care analysts' take has been consistent through the ups and downs of the legislative process. Any of the serious proposals in Congress are unlikely to have a major impact on the fortunes of the vast majority of the health-care sector. Certainly new taxes and regulations will impose a burden, but the added volume from new customers being forced to take on health insurance could make most of that up.

Overall, the State of the Union did not break a ton of new economic policy ground. Obama reiterated his goals of creating jobs, reforming the bank and health system, and providing better access to education. There was talk of needing to freeze spending and bring down record deficits. This will happen in 2011 at the earliest, and it is still too early to predict where the big cuts would come from and who the winner and losers will be. Still, given how important government actions have become, it would behoove investors to keep an eye on what part of the stimulus will be withdrawn first.

Jeremy Glaser is Markets Editor of Morningstar.com.

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