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BMO's Dr. Sherry Cooper Comments on Historic U.S. Election

TORONTO, November 5, 2008 – President-elect Barack Obama won a decisive victory yesterday, drawing support from all regions of the country and all segments of the populace: young and old; male and female; black, white, Hispanic and Asian Americans; rich and poor; as well as Democrats, Republicans and Independents, according to Dr. Sherry Cooper, Chief Economist, BMO Capital Markets.

Turning former red states blue, most notably in Pennsylvania, Ohio, Florida, Virginia and Indiana, Mr. Obama had long coattails. The Democrats added at least five seats to their majority in the Senate and will represent roughly two-thirds of the House. This historic election has clear implications for the economy and financial markets.

“At a time when consumer and business confidence is at a rock-bottom low, the financial system is in crisis and household wealth destruction has been unprecedented, Americans were hungry for change,” says Dr. Cooper.

The economy and jobs were the central focus of the campaign. Judging from the crowds that spontaneously took to the streets in celebration last night, a new sense of optimism is palpable. The turnaround won't be immediate or easy, but the election-day rally in stocks manifests the potential for renewed confidence and economic growth.

The transition will be much more dramatic than in recent elections. This is the first change of Party during wartime since Franklin Delano Roosevelt first took office in 1933. President-elect Obama will participate in the G-20 financial summit hosted by President Bush on November 15, the first of its kind, to deal with the continuing crisis. But there remain 77 days before the Obama administration takes formal office.

“I would expect an announcement of key Cabinet appointments well before the Inauguration,” says Dr. Cooper. Among the first such decisions will likely be the next Treasury Secretary; prominently mentioned for the post is New Jersey Governor John Corzine, another former chief executive of Goldman Sachs.

President-elect Obama will not chart a radical course. He will now veer to the middle, particularly given the Democratic sway in Congress. Ironically, Obama might well be more fiscally conservative than many expect. His economic advisors, particularly Paul Volcker, are cautioning him to take this route.

Dr. Cooper also noted that the Democratic sweep could mean the following:

Markets will respond positively to the elimination of this one bit of uncertainty. Equity markets, in particular, will see this as a precursor to a reviving economy. Normally, there would be concern about the Democratic sweep of the White House and the Congress; however, given the financial crisis and the strong and clear leadership needed to address it and the recession, the markets may have less of an issue than usual with the Democrats in full control.
President-elect Obama is confronted with a possible $750 billion federal budget deficit, unprecedented government ownership of banks and other financial firms, and an independent Federal Reserve that has already broadened its balance sheet to add support to the commercial paper market, all financial firms, and the economy at large. Fannie Mae and Freddie Mac are also now adoptees of the state.
With this economic and fiscal backdrop, Obama's hands will be tied for some time; any fiscal stimulus package will be geared toward troubled homeowner assistance and efforts to promote job creation. Tax increases will await an economic turnaround.
The economy could get a modest boost in early 2009 from Obama's proposed $175 billion economic stimulus plan (to rebuild infrastructure and help municipal governments avoid budget cuts).
His proposed increases in income and capital gains and dividend taxes for the wealthy will likely occur only when the Bush cuts expire; for income taxes that won't be until the end of 2010, for dividends and capital gains taxes, rates would rise for high-income earners January 1, 2009. This might spur some year-end stock selling to lock-in current lower capital gains tax rates. However, given the dramatic rout in stocks this year, capital gains might well be hard to come by.
Further out, investors might worry that Obama and the Democrats in the Congress will push through legislation on pro-union work rules, taxes on the windfall profits of oil companies and controls on prescription drug costs.
Obama is seen to be more protectionist than the current administration and might attempt to make changes beneficial to the U.S in NAFTA; however, those changes are likely to impact only Mexico because they will deal with the assurance of environmental and labour practices already in force in Canada.
Obama is open to giving support to the Big-three automakers which would be beneficial to the industry in Ontario.
There remains some concern that Obama would want to limit the imports of oil from the Canadian oil sands. He has referred to it as “dirty” oil, but once he takes office, the benefit of reducing the U.S. dependence on Middle East oil will likely offset at least some of these concerns.
Any harm to Canada's exporters, economy or currency coming from actual or potential U.S. protectionism, would be more than offset by a turnaround in the U.S. economy and an easing in financial tensions.
Protectionist moves by the U.S. are not consistent with global growth and cooperation. President-elect Obama is likely to rely instead on domestic environmental and infrastructure support to create jobs in the U.S.

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