| NEW YORK
NEW YORK Feb 12 U.S. investors have had plenty
of reasons to worry about what goes on in Washington, from
"fiscal cliff" fears to concerns about a debt default or
government shutdown. But President Barack Obama's State of the
Union address on Tuesday night is unlikely to be one of those
Unless Obama's speech is so combative that it heralds even
uglier battles with Republicans over the budget, market
strategists say, it is unlikely to derail a stock market rally
that has pushed the S&P 500 index to just a few
percentage points from all-time highs.
The president is expected to strike an optimistic note on
the U.S. economy, highlighting the prospects of job growth. That
should help maintain the positive tone in financial markets,
analysts said, even though the White House and Congress still
have to cut a deal to delay or modify "sequestration," the $85
billion in automatic spending cuts due in March.
"The apex of the political impact on the markets was reached
at the end of the last year with the 'fiscal cliff' drama and
soap opera," said James Dailey, portfolio manager at TEAM Asset
Strategy Fund in Harrisburg, Pennsylvania.
"The built-in expectation right now is they will kick the
can down the road again with the sequester," Dailey said.
Wall Street broadly sees the State of the Union speech as an
opportunity for the president to present long-term goals, many
of which are unlikely to come to fruition.
The chances that Obama will announce concrete measures that
will excite investors are viewed as slim, though he could give a
nod to corporate tax reform, which carries the possibility of
lower tax rates on the repatriation of overseas profits.
On the downside, Obama could suggest raising tax rates again
to help close the deficit, or target tax benefits for specific
industries such as oil and gas, or again mention eliminating the
"carried interest" provision that reduces taxes for investment
Some investors, after having jumped into riskier assets on
the assumption that Washington will eventually work out a budget
deal, are watching to see what tone Obama adopts for working
with the Republicans.
If the president takes a combative approach, "this could
provoke a short-term flight to safety, and see equity indices
sell off by up to 1 percent as traders anticipate painful
negotiations," said Karl Schamotta, senior strategist at Western
Union Business Solutions in Calgary.
WATCHING DEFENSE, ENERGY STOCKS
Most State of the Union speeches see less than a 1 percent
move in the stock market on the following day. The average move
is only 0.15 percent since 1934, when President Franklin D.
Roosevelt first used the term "State of the Union," according to
Jeffrey Kleintop, chief market strategist at LPL Financial.
Still, stocks in the defense, retail and energy sectors
could see some action, analysts say.
Under the current plan, defense spending will be cut by
around 8 percent, while non-defense funding is subject to
reductions of 5 to 6 percent, Kleintop said.
If Obama suggests he is open to mitigating the defense cuts,
that would be a positive for the sector, which has pulled back
lately. Shares of defense companies, such as Lockheed Martin
and Raytheon, have recently fallen from 52-week
highs in anticipation of budget cuts.
The energy sector is another focus. "Clean energy" companies
could get a lift if Obama discusses energy independence, while
any remarks on eliminating tax breaks for the exploration and
production companies could hit shares of companies such as such
as Anadarko Petroleum and ConocoPhillips.
The Jan. 1 deal that Washington struck on the fiscal cliff
raised tax rates on the wealthiest Americans and allowed a
previous reduction in the payroll tax to expire. That cuts into
take-home pay for Americans, but is expected to hit lower- and
middle-class citizens harder.
Rick Meckler, president of investment firm LibertyView
Capital Management in Jersey City, New Jersey, said the bigger
issue remains the fight on revenues, taxes and spending, which
will have a direct impact on consumers.
The Morgan Stanley Retail Index recently hit a
52-week high, but some analysts see those stocks pulling back as
consumers feel the effect of the increase in the payroll tax.