A Pro-Business State of the Union

NEW YORK ( TheStreet) -- This year's State of the Union Address is likely to be different in tone and substance from last year's address. At that time, the President's tone was forceful as he voiced strident attacks on the business community and the substance of his anti-business agenda included financial services reform, climate change legislation, the termination of various oil tax breaks, carried interest, and federal subsidies to banks making student loans. His address was delivered in the midst of an 8% pullback in the stock market, as measured by the S&P 500.

Since the mid-term elections, the President has taken numerous steps toward the political center and is now embracing business interests.
  • The President has taken business friendly actions in recent months such as signing into law the Bush tax cuts which included pro-business provisions such as 100% expensing for businesses to write-off equipment purchases. He also signed off on a free trade agreement with South Korea and pledged last week to sponsor an effort to cut regulatory red tape to help businesses.
  • The President has also reconstituted his advisors, bringing business leaders into key positions. Last week he appointed Jeffrey Immelt, GE's chairman and chief executive officer, as chairman of his outside panel of economic advisers. He recently named William M. Daley, a former JPMorgan Chase executive, as his chief of staff.
  • President Obama's approval ratings have reversed course and moved above 50% (according to Gallup) since he began his shift toward the center. He is focused on winning over moderates (Independents voted Republican by 56-37 margin in the mid-term elections). We believe this year's centrist and pro-business State of the Union address is likely to be both stock- and bond-market friendly.

    During this week's State of the Union address, we will be listening for three key areas of emphasis that have the potential to be market moving: job creation, social security reform, and corporate tax cuts.

    Job Creation

    Of course, politics can drive economic outcomes, but the economy also affects political outcomes. The economy will likely be the key driver of the 2012 election and the most important measure will be job growth.

    As you can see in Chart 1, inflation-adjusted, after-tax income growth of about 3% appears to be the threshold for incumbents to get 50% of the popular vote. Currently, this measure of per capita income is only growing at 1.4%.

    Clearly, factors other than jobs have a bearing on the election. However, job creation may be the key measure by which his presidency will be judged when he is up for re-election in 2012. The President is likely to address measures to stimulate job growth in his address. These may include exceptions to an overall discretionary spending freeze such as spending increases for maritime, road, and telecommunications infrastructure and for job-training programs. With General Electric's CEO heading the President's new Council on Jobs and Competitiveness, intended to come up with ideas designed to get unemployed Americans back to work faster, the programs are likely to be pro-business and, therefore, stock market friendly.

    Social Security Reform

    While the deficit is the number one issue on the minds of voters, there is likely to be more rhetoric than actual spending cuts. The President could highlight some minor cuts to defense discretionary spending as he emphasizes the gains in Afghanistan and Iraq will allow him to continue troop withdrawals. This may result in lower supplemental funding requests, though we do not look for any material cuts in spending.

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