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What will happen in the markets?

[W]e believe the election decision itself will likely act as a tonic for asset values. Investors during these difficult economic and financial times welcome the energy and leadership that the new president will almost certainly bring to the resolution of this crisis. The positive behavior of the equity and credit markets during the week leading up to the election speaks to this effect, though certainly there are many other influences acting on markets as well.

What’s the direction for taxes?

With the Obama victory, the markets will lose any hope they had for John McCain’s proposed corporate tax cut. Given how the polls were going up to the election, however, markets likely had long since given up on this prospect, leaving investors with little need to make additional adjustments now.

On other tax issues, the market will not likely welcome Obama’s proposal to allow the top tax bracket to return to its former level of 39.5 percent and to raise capital gains taxes on higher-income families, from 15 percent to 20 percent.

Doubtless, investors will have difficulty with the president-elect’s proposals to address Social Security’s funding by raising employer and employee withholding from higher incomes by one to two percentage points or to remove corporate tax breaks for firms that move jobs overseas.

But it also seems likely, in this fragile economic and financial environment, that the Obama team will put off such tax hikes for a while at least. Even leading Democratic proponents, such as Representative Barney Frank (D-MA), have argued that the present economic environment argues against immediate tax hikes.

If for some reason the Obama team retains an emphasis on capital gains tax increases, the equity market especially could face a difficult December, as investors try to take as many gains as possible under the present, lower rates; but then the market would likely rebound in January, as they put the money back to work.

How about federal spending?

President-elect Obama has gone on record supporting a second fiscal stimulus package that would include foreclosure relief and a $1,000 cash rebate to lower-income families. He also has proposed spending initiatives to rebuild the nation’s infrastructure and will seek green energy alternatives to imported oil.

And how about health care?

Since the new team recognizes that the economy faces a severe burden from the effects of runaway healthcare costs, and since Obama in particular campaigned on a major healthcare plan, prospects in this area will be particularly important when the new administration takes office.

Milton Ezrati is a partner and senior economist/market strategist, for Lord Abbett. His views are not meant to reflect the firm’s position on any issue, but rather are his individual opinions. :


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