If Obama is re-elected
As the Republican presidential campaign shifts into high gear, candidates have sought to claim the mantle of being the strongest opponent to face President Barack Obama in November. I believe, however, that an Obama victory would provide the best possible economic outcome, provided that he gets serious about longer-term deficit reduction, improves his relationship with business, uses his bully pulpit to provide economic and congressional leadership, and rises above the political fray.
Let's start with some economic facts.
The recent historical record shows that a Republican president left an economic mess, which a Democratic president has sought to clean up. The economy today is clearly better than the one that Mr. Obama inherited from the Bush administration in January 2009.
At that time, gross domestic product was declining precipitously, unemployment was soaring and the financial markets were on the brink of meltdown. Today, GDP is growing, unemployment (while still high) is declining and is at its lowest level since Mr. Obama took office, and our financial system is on stronger footing than before the financial crisis.
A MARKET BOOST?
Second, markets tend to do better under Democrats than Republicans.
Data going back to 1926 show that the S&P 500 and its predecessor index have averaged a 13.4% annualized return under Democrats, compared with a 6.3% average annualized return under Republicans. It is noteworthy that each party has occupied the White House exactly 43 years during that period.
Third, Mr. Obama is likely to fare better on jobs and the economy. All the Republican candidates would cut government spending immediately.
But as leading economists such as Princeton University's Alan Blinder, a former Federal Reserve Board vice chairman, have noted, spending cuts would actually kill jobs. Government spending, including the stimulus bill enacted shortly after Mr. Obama became president, has served to boost the economy.
The Congressional Budget Office's most recent estimate is that at its peak in 2010, the American Recovery and Reinvestment Act added 2 million jobs and cut unemployment by 1.1%, if the midpoint of estimates is used. The CBO also estimated that real GDP was 2.4% higher at the midpoint as a result of the law in 2010.
The CBO's November 2011 report shows that the law had substantial positive effects on the economy last year, as well, and should continue to have positive effects in 2012.
The American Jobs Act of 2011, proposed by the president in the fall and staunchly opposed by Republicans, also was vetted positively by the CBO, which stated that the bill “could have a noticeable impact on economic growth and employment in the next few years.” The CBO also stated that the bill should more than pay for itself, actually decreasing deficits slightly over 10 years.
To be sure, we must tackle the deficit, but immediate, large budget cuts aren't the answer in an economy with elevated unemployment. The better plan is to implement a program to close the deficit over the longer term, after the economy is stronger and unemployment has receded.
It is a fact that higher employment will increase tax revenue.
In this regard, Mr. Obama needs to develop a concrete plan. The plan should be developed in the context of the economy.
Historically, since World War II, federal revenue has averaged 18% to 19% of GDP, and federal spending has averaged a few percentage points more. But as a result of the weak economy and Bush tax cuts, revenue has been lower (about 15% of GDP in fiscal 2011) and spending has been higher (24%).
The president should propose a plan that gets us on the path back to historical norms over the balance of this decade — and preferably to a balanced budget with no deficit. The bipartisan Bowles-Simpson Commission proposed some good ideas in this regard.
Balancing the budget will require a greater contribution from those more economically fortunate. The president should embrace the economically successful, not vilify them.
Our economic issues won't be solved by rancorous debate, especially when our national leader is stuck in the muck of the political fray. Like legendary investor Leon Cooperman of Omega Advisors Inc., who wrote an open letter to Mr. Obama on this subject last year, I come from modest means and succeeded through a combination of hard work and risk taking that is paradigmatic of why our system of capitalism and democracy is superior to all others.
The president has been on the right path in the near term to improve our economy and is more likely than his potential Republican opponents to continue our path of economic recovery. But the secret to success in the next four years will require a bona fide plan for sustained economic growth and moving us closer to a balanced budget.
This has to come from Mr. Obama. Having such a plan would benefit decision making in the private sector and would bring back a historically higher level of economic growth.
(Brien M. O'Brien is chairman of Advisory Research Inc., a value-oriented investment manager founded in 1974 that manages $6 billion in assets for institutional and high-net-worth investors.)
If a Republican wins
In our view, a Republican in the White House will have a very positive effect on the U.S. capital markets. For three years, President Barack Obama has displayed a lack of understanding of what drives economic growth, employment and business confidence. Unemployment has persisted at high levels, and consumers are skittish. Investor confidence is dismal.
A consummate politician, Mr. Obama appears economically tone-deaf and has surrounded himself with advisers who don't understand the nature of economic growth. Sadly, most of his top aides have never worked in the private sector and push left-wing, anti-business social engineering, which historically has led to economic stagnation.
Should the American public elect a Republican president, whomever that candidate may be, it will be an economic game changer.
UNDEPLOYED CASH
Corporate America is sitting on record levels of liquidity, but the cash isn't being deployed to expand business and hire people. Business leaders fear the administration's policies related to taxes, spending, health care costs and other regulations.
The light at the end of the tunnel is that Mr. Obama's re-election chances have diminished greatly over the past several months. The debt ceiling debacle, the downgrade of the nation's triple-A credit rating and the lack of a sound plan for growth, as well as the failure of the supercommittee to reduce spending, have hurt his chances for re-election.
A Republican administration with a pro-growth economic policy of lowering tax rates, cutting government spending and creating a more business-friendly regulatory environment would enhance consumer and business confidence.
To be sure, the market will likely experience increased volatility as the election draws near, but as a Republican front-runner becomes evident and public opinion on the direction of the country solidifies, those marked ups and downs will likely convert into a steady trend upward.
One area in particular where investors may take heart is the amount of cash on companies' balance sheets that is held outside the United States. If a new administration and new Congress can come to an agreement about reducing the tax rate on repatriated foreign earnings, it will benefit large multinational companies that have large amounts of earnings “stuck” overseas.
Companies that would benefit from such an agreement include ConocoPhillips Co., Exxon Mobil Corp., Hewlett-Packard Co., IBM Corp., Microsoft Inc and pharmaceutical giants such as Eli Lilly & Co. and Merck & Co. Inc.
Individual and institutional investors in particular are likely to focus on the opportunities associated with resurgent economic growth spurred by an environment of pro-growth policies. Free-market principles and entrepreneurial spirit, which would likely accompany a Republican administration and Congress, should raise confidence that prosperity can return.
Many leading U.S. corporations are experiencing double-digit earnings growth while sporting near debt-free balance sheets. With the cash rolling in, dividends are being increased dramatically and share buybacks are growing.
Companies that are able to raise their dividends consistently reflect their underlying growth of earnings.
Colgate-Palmolive Co., 3M Co. and Kellogg Co. are companies that have steadily increased their earnings and dividends for years. Others include Lowe's Cos., Republic Services Inc. and VF Corp.
As investor confidence improves, these types of rock-solid companies will do well. Oddly, the shares of many of these companies are selling at historically low valuations.
The cliché “Buy low, sell high” requires that you actually buy low. Now is that time.
RECIPE FOR RECOVERY
In my more than 40 years in the investment counsel profession, rarely have I witnessed such well-run companies with great business characteristics selling at such depressed valuations. With the likelihood of an increase in price-earnings ratios, due to rising investor confidence, you have the recipe for a strong stock market going into the 2012 elections cycle.
The engine of economic growth is stuck in neutral due to poor policies coming out of Washington. A new Republican administration that would control spending, enact pro-growth policies and reduce overly burdensome regulations would lead to an improving economy — perhaps not immediately, but over the course of four years.
The stock market would anticipate this happy scenario. Indeed, a change is coming to Washington — a change that we can believe in.
(George P. Schwartz is president and chief executive of Schwartz Investment Counsel Inc., a registered investment adviser providing investment counseling to individuals and institutions, including the Schwartz Value Fund and Ave Maria Mutual Funds.)
