Obama’s Inauguration and Economic Policies
• US$775 billion fiscal spending largely expected to address infrastructural issues initially.
• Government investment in non traditional energy sources such as wind and nuclear (and biofuels) is likely
• A concern for investors is whether this has already been priced into energy and infrastructural companies
With the Democrats holding the House of Representatives and the Senate since November 2006 and now the advent of President Obama from the 20 January 2009, some serious policy decisions are at last to be proposed and acted upon. Therefore an expectation of follow through on election policy promises is likely, but of course after the usual serious debate of the issues in question.
Clearly in terms of the US markets a focus for investors now will be on how quickly Obama’s policy decisions begin to grapple with the domestic slowdown which even now appears to be accelerating, certainly if the latest rapidly rising unemployment figures are to be believed. The first decisions are already being seen with a fiscal spending proposal of US$775 billion (at the time of writing) over the next two years to be spent to reflate the US economy. Priorities, as one would expect, are on the various domestic promises made on tax reliefs, broadening health care insurance coverage, and US energy and environmental policies.
Initially, however, it does appear the US markets are expecting this money to be spent on government infrastructural issues, and in the same vein as getting Americans back to work, the plans on improving a chronic underinvestment for the past 30 years on roads and rail, improving bridges, building schools and tackling electricity supply and distribution, are long overdue. The plans to free America of its reliance on foreign fuel sources is also part of this commitment and therefore non traditional energy sources such as wind and nuclear (and biofuels) will also be close to the top of the agenda.
Investors have been aware of these spending trends, both domestically and internationally for some time, hence the emergence of an almost mania like behaviour towards stocks benefiting from all energy independence and large scale infrastructure projects, and indeed alternative energy sources, in the first half of 2008. Last year it was the high oil price which drove this, due to supply fears, and expected energy demand from developing nations. The higher energy price of course just focused investors’ minds on what is a major long term issue.
With the collapse of the oil price, due to the global slowdown, these groups have effectively crashed to lows not seen in years on fears many of the capital projects would no longer be funded, partly due to liquidity and credit issues, but also because they were no longer viable at the lower oil price. The good news is that the domestic and global slowdown has arrived in full and the US Government to all intents and purposes is riding to the rescue of this theme.
The very real worry for investors right now though is whether Obama’s spending plans have already been priced into these energy and infrastructural companies, before a dollar is even spent. These groups may have taken a thorough drubbing following highs seen in mid 2008, and in some instances are at 15 year lows, but it cannot go unnoticed that many stocks whilst still looking attractive have in fact rallied dramatically from their lows. Major engineering and construction groups have fallen some 70% if not more from their May 2008 highs, but since November have rallied close to this figure. The rally seen has also been at the expense of more stable defensive groups, such as consumer staples. The decision we need to make as investors is whether the rally is too much too soon, and sucked people in, or if the promise of Obama’s millions will stimulate further interest.
