On January 25, President Barack Obama delivered the annual State of the Union address. The tone of the speech — and the overall feel of the event itself —reflected some significant changes from years past. Much of the president’s softer approach likely can be attributed to the shift of power in the House of Representatives to the Republicans, the result of last November’s election. The President certainly struck a balance, keeping his rhetoric more middle-of-the-road than conservative or liberal.
That softer approach was also reflected in the fact that many members of Congress actually crossed party lines to sit together, rather than remaining on opposite sides of the aisle. This change, along with some refreshing and unexpected, albeit vague, proposals announced by the President, seemed to create a sense of renewed willingness among Congressional members to work together. And if that happens, it could impact the financial markets.
What might we expect in the coming days and months?
The President’s emphasis on the need for greater fiscal responsibility from the federal government, coupled with a goal of deficit reduction and a more pro-business stance, could lead to the greatest potential impact on both equity and fixed income markets.
Equity markets — If we had to point the needle in one direction, we would say most of the initiatives discussed in the address should be viewed as positives for equity markets. It appears that the loss of Democratic control in the House, as well as fresh faces on the President’s economic council, have certainly gained his attention. The result is a more accommodative, pro-business central government that understands the country’s need to regain its global competitive advantage and recognizes that, to get there, the U.S. needs to grow its economy and become more of a producer and an innovator, not just a consumer.
Incentives for increased research and development for corporate America, as well as a reduction in the corporate tax rate could impact the markets.
Fixed income markets — The impact of the President’s speech on the debt markets may be a little harder to read.
Treasuries rallied before and after the President’s address, largely due to a well-received 2-year auction, the strongest in the last 10 auctions, as well as the President’s comments about putting a freeze on spending.
Capping the deficit is a popular topic these days, and the fixed income markets responded positively to the news. A reduction in the deficit also has the potential to make Treasuries more attractive not only domestically but also internationally. On the other hand, it could have a negative impact on the Eurozone, as investors seeking minimal risk may be more likely to return to a U.S. dollar-denominated Treasury instead of investing in countries that are at risk of default.
It’s still too early to tell how the markets will ultimately respond, but if the President is able to take steps to curb spending and reduce the deficit, while increasing investment in research and development, it could add up to a positive environment for the markets —and for investors.
Kevin Dick is a financial advisor with Commonwealth Financial Network at 715 S. Highway 87, Suite A. Contact him at (928) 474-4350. Authored by Jim McAllister and Fred DeBaets, senior research analysts at Commonwealth.