Stock prices fell sharply yesterday after Barack Obama won the U.S. presidential election by the widest margin since 1996 and the Democrats gained 19 seats in the U.S. House of Representatives.
Although many stock market pundits were quick to blame yesterday’s stock market rout on the Democrat’s control of both the executive and legislative branches of government for the first time since 1992, my research indicates that an Obama presidency will lead to improvements in the economy and gains in the equities market — for the next 12 to 18 months.
That’s because the U.S. economy is badly in need of some old-style Keynesian fiscal stimulus measures, and the Democrats have promised to provide such stimuli.
For those of you who aren’t familiar with Keynesian economic theory, here’s a brief synopsis:
During the Great Depression of the 1930s, the British economist John Maynard Keynes argued that government policies could be used to increase aggregate demand during economic downturns, thus increasing economic activity and reducing high unemployment and deflation.
Keynes hypothesized that government agencies could stimulate their economies by investing in infrastructure projects and increasing spending on various other programs. Keynes believed that any short-term increases in federal government deficits that might result from temporary spending programs would evaporate as soon as those programs took effect and aggregate economic activity returned to a more normal level.
Although many economists have disputed Keynes’s theories over the past 60 years, my research indicates that significant increases in government spending are now needed to jumpstart the U.S. economy since consumers will likely continue to reduce spending and business enterprises will likely continue to cut back sharply on capital investments.
A few of Obama’s government spending proposals are outlined below:
(1) The creation of a $25 billion fund for those states that would prevent budget reductions in health, education, housing, and heating assistance.
(2) The creation of a $25 billion fund to prevent cutbacks in road and bridge maintenance and to fund school repair.
(3) The creation of a yet-to-be decided fund to invest in new manufacturing strategies.
(4) Doubling the funding for organizations that would work with U.S. manufacturers to improve production efficiency and implement new technologies.
(5) Spending $60 billion in federal money over the next 10 years to expand and enhance existing federal transportation infrastructure projects; to make broadband technology available to every community in the United States (via the implementation of new tax and loan incentives); and to double federal funding for basic research projects.
(6) Spending $150 billion in taxpayer money over the next decade to develop cleaner, renewable energy sources, and to assist companies in the development and commercialization of plug-in hybrid automobiles, as well as in the development of bio-fuels and related infrastructure projects.
(7) Increasing the size of the military and replacing and modernizing naval ships.
(8) Providing $10 billion to persons to stay in homes that they couldn’t otherwise afford.
In total, Obama proposes spending $130 billion a year in new government programs over the next 10 years. Obama claims that his government spending plans will be funded by ending the war in Iraq; by increasing federal income taxes on persons making more than $250,000 a year; and by raising the capital-gains tax.
Although I’m concerned about the longer-term implications of those proposals, given that they will likely lead to a significant rise in the federal budget deficit, I expect that an implementation of Obama’s government spending plans will stimulate the U.S. economy and therefore lead to gains in stock prices over the next 12 months.
In regards to the selloff in stock prices over the past two days, my research indicates that the most recent decline in equities had little, if anything, to do with the Democrats’ victories. Rather, several technical indicators that I monitor clearly indicated that stocks had risen to overbought levels on Monday and Tuesday of this week and that stocks were therefore due for a pullback.
Click here if you’d like to read more about my analysis of the economy and how to profit during bull and bear markets.
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