The Stock Market Rally and the Election
The improvement in the economy has been quite limited with only a small segment of the population participating, leading to what we have described as "two economies." One has seen a rebound, but the other has not really experienced much improvement. The one that has experienced a rebound has been largely due to the rebound in the equity market. This creates even more incentives for the president to do everything in his power to maintain a positive performance by the S&P 500.
This has really not borne any resemblance to the "V"-shaped recovery that many were forecasting. It is much closer to the jagged "U"-shaped economic recovery that we predicted.
I have said previously that this is quite different from earlier recoveries. In most of those earlier cases, government stimulus merely "primed the pump" until the private sector took over. Now, government remains "the lender and spender of last resort."
Prospects for Fiscal Stimulus
As we mentioned earlier in this commentary, we believe much of the economic rebound may be due to accelerated depreciation found in the "Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010." This was passed when the president's party controlled both houses of Congress.
It was much easier for the president to pass fiscal stimulus to assist in his re-election in this environment. In the current environment in which the Democrats only control the Senate and in which the Republicans want to do everything possible to prevent President Obama's re-election, the prospects for additional "official" fiscal stimulus are quite limited.
However, there are forms of "unofficial" fiscal stimulus that fall primarily under the control of the president. Increased gas prices have acted as a tax on the consumer. Thus, an immediate decrease in prices could act as a tax cut, a form of fiscal stimulus. There has been discussion that the president may unilaterally decide to release supplies from the Strategic Petroleum Reserve to achieve this.
There is also discussion that the government must force a write-down of delinquent mortgages to offer relief to homeowners. Since Fannie Mae(FNMA) and Freddie Mac(FMCC) account for a substantial portion of mortgages outstanding, the president could utilize his position to force these entities to adopt his position.