Stock and bond investors enjoying the biggest advance in more than a decade under Barack Obama may see the momentum fade as the rallies age and the president confronts Congress over spending cuts and taxes.
Obama will continue to support the Federal Reserve’s interest-rate policy, according to Brian Jacobsen at Wells Fargo Advantage Funds and Bruce Bittles of RW Baird & Co., which oversee a combined $294 billion. At the same time, his re- election endangers tax breaks enacted a decade ago on dividends and capital gains. The advance in the Dow Jones Industrial Average that began just after Obama took office is five months away from matching the mean length of bull markets since World War II, data compiled by Bloomberg show.
While Obama’s victory in 2008 spurred the biggest plunge ever for the Dow on the day after an election, gains for American assets over the past four years are among the best in the developed world. Fed Chairman Ben S. Bernanke’s actions to revive the economy after the worst recession in seven decades helped send the Dow up 67 percent and U.S. bonds to a total return of 27 percent, data compiled by Bloomberg show.
“There are different sections of any bull market and we’re probably entering the continuation phase versus the initial expansion,” Larry Gilbert, who helps oversee $25 billion as managing director at Chicago-based HighTower Advisors, said in a phone interview. “The market returns depend in part on how the next president deals with the structural economic issues in this country. We’re very cautious.”
Futures on the S&P 500 declined, reversing an earlier gain after Obama claimed victory. Contracts expiring in December dropped 0.6 percent to 1,416.1 at 7:57 a.m. in New York.
Obama has been president during the weakest post-recession economic recovery since World War II as unemployment averaged 9.1 percent and the housing market stagnated until this year. Economists forecast gross domestic product will expand 2 percent in 2013, a slowdown from this year’s 2.1 percent projection.
Treasury yields were already at record lows when Obama took office and have fallen as Europe’s debt crisis boosted demand for dollar-denominated assets. The S&P 500, up 111 percent since March 2009 amid 10 straight quarters of earnings growth, would reach the average length of bull markets since World War II in April, data compiled by Bloomberg show.
“This is going to be a bumpy ride in 2013,” Matt McCormick, who helps oversee $7.3 billion as a money manager at Cincinnati-based Bahl & Gaynor Inc., said in a phone interview.
CBS Corp. in New York, owner of the most-watched TV network, Cincinnati-based Fifth Third Bancorp and Expedia Inc. in Bellevue, Washington, the second-most valuable online travel agency, posted some of the biggest advances among S&P 500 stocks since the market bottom in 2009, rising more than 900 percent. Wyndham Worldwide Corp., the franchiser of Days Inn hotels and Super 8 motels, increased almost 17-fold to lead gains in the index.
The Dow slipped 5 percent the day after Obama beat Republican John McCain in 2008 at the height of the credit crisis that erased $11 trillion from American equity values. The decline wasn’t made up until July 2009 after Bernanke dropped the benchmark rate to a record low and Obama signed a $787 billion economic stimulus package.
Now that the election has been decided, investors will turn their focus to the $607 billion of tax increases and federal spending cuts set to kick in automatically in January, the so- called fiscal cliff. The Congressional Budget Office has said the U.S. economy would slow by as much as 0.5 percent next year if Congress fails to keep the increases from taking effect.
The rate on dividends for high-income taxpayers will rise to 43.4 percent from 15 percent and the top rate on capital gains to 23.8 percent from 15 percent. For an individual with $10,000 invested in the S&P 500, payouts would fall to $120 a year from $180.20 should the old rate be reinstated. An investor who sells the stock at a $5,000 profit would face capital gains obligations of about $1,190 compared with $750 now.
Utilities and phone companies, the industries with the highest dividend yields in the S&P 500, had the worst performances in the index yesterday.
Obama’s victory “will make the fiscal cliff more difficult to deal with,” Bittles from Milwaukee-based RW Baird said.