- The Obama administration's proposed fiscal year 2010 budget reverses plenty of policy trends and starts entirely new ones—but we're nowhere near the final product.
- The budget proposes new tax hikes on wealthy individuals and businesses and sneaks in more money for banking bailouts.
- Perhaps the most ambitious (and costly) portion of the plan aims to make good on a campaign promise for universal healthcare.
- Though we still don't believe our government can sink the ship for good, all this bumbling about makes the near term more uncomfortable as volatility persists.
Boy, have our Beltway buddies been busy lately. For over a week, we've been inundated with new proposals and plans. And for about as long, stocks have bumped around lows set last November. Coincidence? Probably not.
In the latest major policy release, the Obama administration on Thursday presented the proposed budget for fiscal year 2010. The proposal is a bit of a blockbuster. If wholly implemented, it would reverse plenty of policy trends and start entirely new ones. But we're nowhere near the final product. Expect a prolonged pitched battle in Congress. The budget started with Thursday's White House blueprint, and will work its way through a number of congressional committees and votes before final approval late this summer or early fall.
Yet the substance of the early product is something to see. Running up to its release, the administration promised it would cut the deficit in half by 2013. That'd be something, considering the proposed budget and all other spending would give us a $1.75 trillion deficit in 2009. And it's cute that cutting the newly inflated figure by 50% would still leave the biggest ever deficit prior to 2009.
But, in typical governmental fashion, what one hand giveth, the other taketh away. The $300 billion or so in tax cuts in the recently approved stimulus proposal are "balanced" (and then some) by the new budget's tax hikes, purportedly targeting only wealthy individuals and businesses. (We fail to see how tax hikes on businesses don't end up impacting everyone—but that's a topic for another day.) The budget also calls for sale of CO2 emission permits to meet new emission standards—another (modestly camouflaged) corporate tax. Mind you, historically, new taxes haven't spelt doom for stocks, but they're not exactly economically stimulative either—allegedly the administration's priority.
The budget proposal also allocates an additional $250 billion for bank bailouts and another $1 billion in infrastructure spending. Didn't we just pass two other bills including this kind of spending? Does that mean things have worsened since then? Just more inconsistency for investors to factor in. Perhaps the most ambitious (and costly) portion of an exceedingly ambitious plan called for the formation of a $630 billion healthcare fund—part of a campaign promise for universal healthcare. Health Care stocks didn't respond kindly to the news, falling 5%, the most of any sector, and pushing the S&P 500 negative overall.
Stocks have been jumpy for awhile now, perhaps waiting to see what the new administration will do and fearing the worst. Will this budget pass, as is? Likely no—they never do. Plus, dig in a bit and you see it contains some pretty hard whacks at tax deductions for both mortgage interest and charitable contributions. It can't be politically smart to seem anti-homeowner and anti-charity—at least right now. Either way, expect this budget to morph considerably between now and the fall.
All this uncertainty likely adds to more volatility in the near term—agonizing, but pretty typical of bear market bottoming periods.