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Monday, 7 July 2008

Is Obama Dragging Down Stock Prices?

Or would the economy improve under a President Obama?

By Fred Yager
ConsumerAffairs.com
July 5, 2008

As Wall Street pundits search for villains in the current economic meltdown, some have suggested that the prospect of a victory by Barrack Obama in November was dragging down stock prices.

On the other hand, there's no shortage of more obvious causes, most notably rising oil and food prices, sinking home prices, a weak dollar and the nation's stupendous debt load.

With Wall Street straddling bear market territory, one analyst noted that an Obama victory meant taxes would go up, especially on dividends and capital gains, and claimed that isn’t good for the stock market.

Well, it might not be all that bad for it either.

There’s historical data showing that tax-and-spend presidents have had a largely positive impact on the markets, at least for the first couple of years. The higher taxes are used to create jobs and fund government programs that tend to help the less fortunate, which puts at least some money back into the economy.

Obama says he would raise income and Social Security taxes for people making more than $250,000 a year, a change that would affect the wealthiest 3% of all Americans. The argument most often heard is that wealthy people won't work as hard if they pay more of their income in taxes.

Maybe so, but in my experience most of them just hire more accountants.

Meanwhile, John McCain takes the opposite approach. He not only promises not to raise taxes, he also wants to cut taxes for businesses and corporations to boost competition, which he claims will produce jobs in the private sector.

Since many of us tend to vote with our wallets, we need to decide what to make of these diametrically opposed tax policies sometime between November.

What about history? Traditionally, the stock market has performed better with a Democrat in the White House than a Republican and some analysts are saying that trend could continue.

On the other hand, the first two years of a presidential term tend to be the worst years for the stock market no matter which party wins.

The reality is that the president -- any president -- has limited impact on the economy and even less on the stock market.

Plus, neither candidate has put forth any type of savings policy. That means all we have to go on so far is where they stand on taxes and that’s not all that clear either. With the lowest savings rate in the industrialized world, the United States is clearly slashing its own throat, so you'd think the candidates would at least mention it now and then.

Capital gains
Reduced tax rates on capital gains and dividends expire in 2010, and McCain says he wants to keep current levels. Obama wants to eliminate special tax treatment for dividends and capital gains, while excluding lower income people.

How does this affect you? Well, let’s say you have your money invested in mostly tax-deferred mutual funds. Any change in the dividends and capital gains rate won't matter, because everything comes out as ordinary income tax anyway.

If you’re an investor, what you really need to be concerned with is that whatever happens to dividends and capital gains happens equally. That’s so investment incentives for both money managers and investors stay the same.

If the tax policy suddenly favors dividends over capital gains that would force money managers to change the way they invest to take advantage of the better tax situation and that wouldn’t be good for the stock market. Fortunately, neither candidate is supporting that approach for now.

So which one will have a more positive impact on your wallet? It all depends on how much you already have in your portfolio and where it’s invested.

If you have your money in taxable accounts, you may want to consider McCain. If your money is in mostly tax-deferred savings, it doesn’t matter which candidate gets in. If you’re hoping for a faster initial upswing in the market, Obama just could be the answer.

Long-term, it's worth noting that we live in a consumer economy. If Americans don't have money to spend, they suffer and so does the economy, so it's important for each candidate to have a well-thought-out economic policy that addresses the working person's concerns.

1 comment:

Anonymous said...

Consider that democrats, at least in recent history, have come into office during economic downturns, thus they typically reap the benefit of an utterly predictable upturn (helped in part by deficit spending). This correlation is not lost on politicians: The GOP had a very hard time getting someone to run against Clinton in 1996 because of the economy. Clinton was unpopular (as the 1994 midterms showed) but the economy was strong and he ran on a "don't change the horse in midstream" message. It worked.

I knew that the GOP would have a hard time, and will likely lose. Many Reps are secretly hoping so because it will purge the party and because democratic excesses will turn off voters, thus ensuring a GOP resurgence. Not that far fetched, and it is tied in part to the business cycle.

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