President Obama and Markets

Transitions will matter.

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Stocks are off a bit today following a pre-election rally. Attention is turning to how Sen. Barack Obama's historic victory and the large (though possibly not filibusterproof) Democratic majority will handle its transition into managing what remains a very tough economic environment.

A few early reactions:

Merrill Lynch's foreign-exchange strategists outline what to watch in the post-election season for the dollar, saying the key factor will be picking a new treasury secretary:

The canonical example of this is the switch from Donald Regan to James Baker during the Reagan Administration, which was a substantial factor in marking the turn from dollar strength to dollar weakness. Ultimately, the key issue could be around market confidence. For better or worse, markets appear more comfortable with a Treasury Secretary with more direct financial experience, rather than corporate. Familiarity is also a big plus; as with the selection of the Fed Chairman, markets would likely perceive a "surprise" pick as a negative. The main candidates discussed, however, are roughly familiar to and around markets: NY Fed President Timothy Geithner, Clinton Treasury Secretary Lawrence Summers, and New Jersey Governor Jon Corzine.

Whoever is tapped to lead the treasury, the speed and apparent smoothness of the transition will matter, too:

The main issue that markets will watch related to the election will be the transition from the Bush Administration. Media stories have reported that both parties agree that the transition process is unusually advanced, even amid an environment in which the Treasury Department, the Federal Reserve, and the White House are all apparently short-staffed in terms of personnel. Quick appointments and joint action could rally market sentiment in the near term, especially given the continued uncertainty about the direction of the TARP; there is little clarity whether TARP will be devoted towards injecting more capital into more firms of more industries, directly assisting homeowners with their mortgages, buying troubled assets through an auction process (or even directly), and so forth. In contrast, stories of culture clashes and departmental in-fighting will be quite negative and dampen any hopes around a nearer-term recovery.

Bob Doll, chief investment officer of equities at BlackRock, picks some winning industries but says stocks tend to do worse under unified governments:

Historically, equity markets tend to underperform when Congress and the White House are occupied by the same political party, and tend to perform better during times of "divided government," Mr. Doll said. "If history is any guide, 'unified government' could pose a minor, but not serious hurdle for equities for at least the next two to four years." Traditional manufacturing industries, construction, and alternative energy are among the market sectors that could benefit under an Obama Administration.