Barack Obama’s first year in office has, by most accounts, been a mixed bag. The massive $787 billion stimulus plan helped to avoid an even deeper recession, but failed to impact joblessness in any meaningful way. Instead of seeing a downturn in the unemployment rate as promised, Americans have seen the rate grow to double digits. Comprehensive healthcare reform was seemingly within days of becoming a reality, but now seems like a long shot. Outrage at Wall Street has ebbed and flowed, reaching a fever pitch in recent weeks following massive bonus payments in the financial sector.
One rating that has gone down in Obama’s first year is the President’s approval rating, which is beginning to have far reaching effects on local and national elections. This has been most recently demonstrated in Scott Brown’s upset Senate win in Massachusetts, which revitalized Republican hopes of regaining control of Congress in the upcoming midterm elections.
It is against this backdrop that Obama will give a highly-anticipated State of the Union Address. The focus will reportedly be achieving job creation them without expanding the already ballooning deficit. As Obama attempts to walk an increasingly narrow tightrope between the demands from the left (who believe he hasn’t done enough) and the right (who feel that the President’s plans are going too far), tonight’s speech should give investors some clues on what the administration will target in the upcoming months and what sectors of the economy will be most impacted.
Below we highlight five ETFs in focus ahead of Obama’s first State of The Union Address.
Municipal Bond ETFs
Next January, the Bush tax cuts are set to expire pushing the top tax rate and dividend tax up to 39.6% and the capital gains tax to 20%. If this is allowed to happen, municipal bond ETFs such as iShares S&P National Municipal Bond Fund (MUB) and SPDR Lehman Municipal Bond ETF (TFI) could be in high demand among investors in high marginal tax brackets.
Municipal bond holders generally do not have to pay any federal taxes on proceeds from these bonds, which for high-tax bracket investors will end up being 360 more basis points in 2011. However, some are calling for Obama to leave the tax cuts in place for a few more years, noting that a recession is the wrong time to raise taxes. Noted economist Arthur Laffer states that if the tax cuts are allowed to expire it could “represent a larger collapse than occurred in 2008 and early 2009″ thanks in large part to investors shifting money to be taxed in this year.
A favorite target of the Obama administration has been the “Wall Street Fat Cats” who many blame for the current economic crisis. Recently, Obama has proposed more than $100 billion in new taxes on the largest financial institutions in what is being called the Financial Crisis Responsibility Tax. This initiative would tax large financial companies 0.15% on their assets minus high quality capital such as common stock. Should Obama spend a great deal of his speech assailing Wall Street or proposing more regulations to rein in the firms, it could score him some points with voters but further strain his relationship with the financial sector. Financial ETFs in focus include the iShares Dow Jones U.S. Financial Sector Index Fund (IYF) and SPDR Bank ETF (KBE). Both of these funds, much like the larger financial sector, have seen their shares slump recently as political risks from Washington have resurfaced.
It remains to be seen if the Obama administration will push for healthcare reform after the Democrats’ stunning defeat in Massachusetts, which leaves them one vote short of a filibuster proof super-majority. It seems unlikely that Obama will give up that easily on what he has termed his signature domestic issue, especially considering that the House of Representatives has already passed a version of the bill. While it seems likely that any healthcare plans will have to be drastically scaled back in light of the new political realities, tonight’s speech could be an opportunity for Obama to rally the troops for one last push for comprehensive reform. Regardless of what Obama announces in his speech, it should give some direction to Healthcare ETFs especially insurers such as iShares Dow Jones U.S. Health Care Providers Index (IHF) which have the most to gain or lose from any proposals.
After receiving $200 billion back from TARP beneficiaries, Obama will reportedly propose to use the money for job creation activities. These activities which, according to CNN, will include bridge and road building, home weatherization, and small business incentives, will help to pour more money into the system and could increase middle class spending on discretionary goods. If Obama announces a plan to use the money for this purpose it could boost retail ETFs such as SPDR S&P Retail ETF (XRT) and PowerShares Dynamic Retail (PMR) which will likely benefit from the increased spending as it filters down from the government and into citizens’ pocketbooks.
The Treasury market looks to be in focus to see if Obama’s proposed discretionary spending freeze gets closer to reality. Although discretionary spending makes up a relatively small section of the budget (roughly $450 billion of the $3.5 trillion), it would be encouraging to see steps being made to reduce or at least limit the deficit. This move would likely help to calm fears of overseas investors who make up the bulk of Treasury holdings and deficit hawks that are growing increasingly worried over the nation’s balance sheet. Such a move could marginally push down Treasury yields and boost prices which would be welcomed news for Treasury ETFs such as iShares Barclays 20 Year+ Treasury Fund (TLT) or iShares Barclays 1-3 Year Treasury Fund (SHY).
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Disclosure: No positions at time of writing.