Veteran Public Television commentator Mark Shields had an interesting take on The State of the Union Address. He noted that conservative criticism came in two different forms: Some saw current policy as "five minutes to change" while others saw it as "five minutes to midnight." This is a useful perspective for investors.
Shields placed President Reagan in the former, hopeful category, and Wisconsin GOP House member and new Budget Committe Chair, Paul Ryan, as part of the midnight group.
The Obama Speech
President Obama had a number of Reaganesque flourishes, including highlighting audience members and special recognition of some political opponents. There was an effort to charm and to cross the aisle. Even crossing the aisle had a new feeling, since the parties were not seated in separate sections, helping to create the appearance (and perhaps even the actuality) of bipartisan support for the President's remarks.
Here are the highlights most relevant for investors:
- A spending freeze. This is aimed at cutting the deficit. It is not intended to replace the Deficit Commission recommendations, but rather to be part of the solution.
- Education investment. The President invoked the Sputnik era to explain why the US needs to prepare 100,000 new math, science, and engineering teachers. The definition of investment employed here is one of the sharp differences between the parties.
- Corporate taxes. President Obama is in favor of cutting rates -- a market friendly move -- but he also wants revenue neturality by cutting loopholes. He also came out for cuts in favorable tax treatment for energy companies. This is a mixed bag for investors.
- Technology Goals. Mr. Obama cited the need for clean energy sources, high-speed rail, and more high-speed wireless. The federal government commitment to these programs was rather vague.
- Vetoing earmarks. Mr. Obama says that he is prepared to veto bills with spending earmarks. Many members of Congress agree with this in principle, but still have earmarked spending for their own districts. The question is who can best allocation appropriations.
- Social Security. The President is open to changes in Social Security, but opposed to permitting private investment programs.
- Tort Reform. This was a big surprise. The door for bipartisan cooperation on medical malpractice suits is now open.
GOP Response
The response to the SOTU address by someone from the party out of power is an unfair challenge. Even placed in a setting with some trappings of power, nothing can equal the symbolism of addressing a joint session of Congress.
Paul Ryan's response was, as Shields observed, part of the five minutes to midnight variety. There is a different viewpoint to represent -- less emphasis on government, lower taxes, dramatic spending cuts -- and Ryan made these points. He did so strongly, in a well-written presentation. I suspect that the reception will not give him full credit because of the setting and a rather stilted presentation.
What to Expect Next
We will now see some early tests of the potential for cooperation. Will there be compromise on modifying health care legislation? Can we succeed in cutting corporate tax rates? The deficit?
Neither party is going to cave in, so it is a test for leadership. The debt ceiling debate will be an early test.
Market Response
On balance, I thought the speech hit most of the notes that I had listed on my wish list for investors. There were a few extra positives, and nothing that seemed discordant. I expect the market reaction to be mildly positive. By the end of the day we'll be back to analyzing the Fed, QE II, and corporate earnings.
My usual warning: Don't let your strong partisan viewpoints interfere with your investment decisions!
