Opinion: Obama's Strategies Will Work

5) Consumer confidence will rebound

Amid many strains, in particular rising unemployment, consumer confidence will rebound. It is already beginning to follow an established pattern whereby consumer confidence levels increase around the time of a presidential election and into the inauguration period and beyond. Confidence levels are often correlated with presidential approval ratings, which for Barack Obama are sure to be higher in his early days than his predecessor, whose numbers have been low for quite some time. This represents a substantial change. Putting policies aside, Barack Obama is the type of man who exudes confidence, just as Ronald Reagan did (many gasp when I include Obama and Reagan in the same sentence, but for many in America the comparison rings true). Confidence levels are not normally as important as they are today, but it is a lack of confidence that is feeding the economic and financial crisis. Recovering confidence will be a crucial ingredient in ending the crisis.

6) Investment-grade corporate bonds will gain favor

Lured by returns that are comparable to the historical returns earned on corporate equities, investors will move increasingly into investment-grade corporate bonds. Investors on November 25th began their first major foray out of the risk spectrum, moving into agency securities and agency mortgage-backed securities, doing so in response to an announcement by the Federal Reserve of a plan to purchase $100 billion of agencies and $500 billion of agency MBS.

Investors will feel compelled to move further out the risk spectrum if yields stay low in the mortgage realm, not only because of the allure of higher returns elsewhere but also because of the beneficial effects that improvements in the mortgage realm will have for both the economy and the financial system. A major move in corporate bonds will not occur until investors can more clearly discern the depth and duration of the recession. For this to happen economic data need not improve much, they merely need to stop getting worse. When this happens, corporate equities are likely to gain, too -- corporate bonds and corporate equities gain on the same premise: the promise of improved cash flows.