Why Wall Street fears Obama

Creating a disincentive for the rich to get richer may sound good in an election year, but it doesn't make for great industrial policy. Especially at a time of broad economic stagnation when home prices are still plunging, consumer spending is weakening, credit is in short supply and a weakened financial system is already repellent to all but the bravest entrepreneurs.

Right or wrong, Wall Street's message is that a policy of stripping more money from people with proven records of creating wealth to give more to people who are shopping for Asian-made goods at dollar stores will only exacerbate the tenuous current economic climate, not help it.

In this environment, shares of companies that have thrived during the Bush and Clinton administrations and are representative of industrial growth -- such as technology, energy, capital goods and transportation -- are likely to falter badly. In their place, we're likely to see large makers of consumer staples such as toothpaste, detergent, tobacco and drugs shake off their recent torpor and emerge as new leaders, as they did during the plunge in shares last Wednesday.

Companies such as Procter & Gamble (PG, news, msgs), Colgate Palmolive (CL, news, msgs), Altria (MO, news, msgs) and Merck (MRK, news, msgs) have been hammered in the past year as they've been pressured by rising costs of raw materials. But if commodity prices stabilize, as they appear to be doing, staples could return to favor as big investors rein in their more speculative impulses and retreat to defensive positions ahead of the election.

Speculation skepticism

Why would commodity prices retreat? There's an election angle there, too. Obama has called for tighter regulation of oil speculators as part of his appeal to voters who are naturally upset about skyrocketing gasoline prices. He's called for the government to clamp down on the buying of oil and gas futures and exchange-traded funds by hedge funds and pension funds, and to prevent energy traders from routing transactions through offshore markets to evade U.S. limits on position sizes. Obama calls this a common-sense approach, though there is no academic consensus on whether any of these measures, and others, would have any real effect on the recent run-up in prices.

Major fund managers aren't likely to wait around to find out whether Obama's proposed crackdown on free trade will work. With global growth softening and demand waning, it looks as if energy prices will settle within shouting distance of their current levels, as fund managers hold on to or slightly reduce their positions.

The best-case scenario for investors laying bets on buying stocks that will succeed in the event of an Obama win: If raw-materials prices stay close to where they are, big companies will raise prices to accommodate the higher costs, squeezing out smaller competitors and fattening profit margins. This combination will provide a setup for modestly positive action among large companies' stocks, trouble for smaller stocks and a mood of mild unease as the stock market indexes trudge fitfully higher yet remain under water for the year through the election, then blast higher to celebrate the fact that the world didn't end after his rival's concession speech.

And the worst-case scenario, based on recent signals from investors? Well, it's not pretty: It would be a repeat of the 2000 election, with investors on edge all year before deciding an Obama victory was worse than they thought -- resulting in a selling frenzy that ends, much like 2002, with every sector collapsing and the S&P 500 sinking to around 960.

Fine print

To learn more about Obama's economic plan, click here.

To learn more about the Tax Foundation, click here.

To learn more about the Congressional Budget Office reports on taxes, click here.

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At the time of publication, Jon Markman did not own or control shares of any company or fund mentioned in this column.

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