More on the Obama Effect on Wall Street and the Economy

In a recent post, I noted the decline of the stock market even as Obama's poll numbers have been rising.

Today's MSN Money has a column looking at the same thing and projecting some into the future. It's not pretty:

Investors this summer have been placing their bets on an Obama presidency, and for the most part that hasn't been good for the market.

Without giving him a chance to explain himself in detail on the campaign trail or at the Democratic National Convention, they are voting with their shares by tossing financial, health insurance, manufacturing and high-dividend stocks into the ash can, and are growing skeptical about energy companies as well.

It's not that major institutional investors don't like the man -- far from it. He has many backers among the financial elite, including multibillionaires George Soros and Ron Burkle. And it's not that there aren't many other reasons for investors to sell stocks now, as the global economy tangles with the terrible twin beasts of bank deleveraging and inflation.

It's just that Obama's rhetoric on taxes and health care is scaring common wealthy people with large capital gains from investments made over the past decade, and a lot of them don't want to wait around to see whether it's just populist fluff that might be set aside once he takes office....

Speaking to reporters recently, the Illinois senator complained that the United States has developed a "winner take all" economy in which profits from economic success have largely benefited the wealthy and left the middle class and poor behind. He told The Wall Street Journal that "globalization, technology and automation all weaken the position of workers" and argued that the government needs to make sure the fruits of success are distributed in a more evenhanded manner.

That kind of campaign talk is red meat for laid-off autoworkers and construction workers in Midwestern swing states, but they're fightin' words to those whose wealth is targeted for redistribution. And the latter just happen to own most of the nation's stocks.

For one measure of investors' fear that their hard-won battle for better tax treatment of stock dividends is in danger of being overturned, look at the behavior of the iShares Select Dividend Index Fund (DVY, news, msgs), an exchange-traded fund that tracks the performance of the stocks that pay the highest dividend yields. It's down 24% this year -- almost twice the 13% decline of the broad market. The steepest part of that decline came after June 1, when it became clear that Obama had bested New York Sen. Hillary Clinton for the Democratic nomination.

Of course, it's not just dividend treatment that has investors pushing the sell button. It's also concern that Obama's tax plans would make the federal government even more reliant on relatively few high-income people to pay most U.S. taxes -- and thereby provide less incentive for business owners to augment their wealth by growing their companies.

That's backed up by this:

Strangely enough, government statistics show that the U.S. tax system is already evolving into one in which a majority of Americans pay little or nothing. Between 1999 and 2006, evidence suggests that the number of tax filers who had no income tax liability after taking advantage of credits and deductions grew to nearly 44 million, according to the Tax Foundation, a nonpartisan (but right-leaning) think tank in Washington, D.C., and Duke University law professor Lawrence Zelenak.

And here's what's coming:

In this environment, shares of companies that have thrived during the Bush and Clinton administrations and are representative of industrial growth -- such as technology, energy, capital goods and transportation -- are likely to falter badly. In their place, we're likely to see large makers of consumer staples such as toothpaste, detergent, tobacco and drugs shake off their recent torpor and emerge as new leaders, as they did during the plunge in shares last Wednesday.

Companies such as Procter & Gamble (PG, news, msgs), Colgate Palmolive (CL, news, msgs), Altria (MO, news, msgs) and Merck (MRK, news, msgs) have been hammered in the past year as they've been pressured by rising costs of raw materials. But if commodity prices stabilize, as they appear to be doing, staples could return to favor as big investors rein in their more speculative impulses and retreat to defensive positions ahead of the election.

A possible pair of scenarios:

The best-case scenario for investors laying bets on buying stocks that will succeed in the event of an Obama win: If raw-materials prices stay close to where they are, big companies will raise prices to accommodate the higher costs, squeezing out smaller competitors and fattening profit margins. This combination will provide a setup for modestly positive action among large companies' stocks, trouble for smaller stocks and a mood of mild unease as the stock market indexes trudge fitfully higher yet remain under water for the year through the election, then blast higher to celebrate the fact that the world didn't end after his rival's concession speech.

And the worst-case scenario, based on recent signals from investors? Well, it's not pretty: It would be a repeat of the 2000 election, with investors on edge all year before deciding an Obama victory was worse than they thought -- resulting in a selling frenzy that ends, much like 2002, with every sector collapsing and the S&P 500 sinking to around 960.

I'll say it again: an Obama presidency will be another Carter term. A disaster for America on several fronts with long term consequences.