Washington Spin, Not Substance, Is Just What Investors Need Now

As Economy Recovers, Obama Turns From Substance to Spin
As Economy Recovers, Obama Turns From Substance to Spin

President Barack Obama's State of the Union address Tuesday was packed with soaring rhetoric. The country needed a new "Sputnik moment," Obama said, and his national policies would help us create more world-leading companies like Facebook and Google (GOOG).

The speech sure was a crowd-pleaser. A poll by CBS (CBS), for example, found a staggering 91% of viewers approved of Obama's proposals.

But investors looking for cues about the shape of future policy shouldn't get take any of those plans as done -- or even doable. Despite the lofty sentiments expressed by President Obama, the White House seems to have moved from substance to spin amid growing signs the economic recovery is gaining steam.

"After two years of ambitious proposals and policy achievements, President Obama used Tuesday's State of the Union address to frame a new narrative about the economy and bipartisanship," analysts at political risk consultancy Eurasia Group wrote in a note to clients. "The speech underscored that the president is moving from a policy-making strategy to a public relations strategy."

Standing Back and Letting the Recovery Happen

No news should be good news as far as the markets are concerned. Strong signs indicate that the U.S. is recovering more rapidly than most had predicted, and highly respected analysts like Deutsche Bank's (DB) Peter Hooper are anticipating a GDP growth rate close to 6% under the right circumstances in the year ahead.

Under those conditions, feel-good rhetoric and flowery oration may in fact be a better way to go than heavy-handed policies that have the chance of backfiring. Speeches about getting tough on spending, for example, will be better than the kind of big budget slashing that could deliver a major blow to overall demand.

A light-touch approach is especially promising given how broad-based the signs of a recovery are. As corporate profits soar, job growth is picking up and may be underestimated at the moment.

Housing, VC and IPOs All Surge

Even the battered housing sector showed signs of life as new-home sales soared passed expectations on Tuesday. The 17.5% surge in sales marked the biggest jump since 1992, analysts at Ned Davis Research wrote in a report Tuesday, and sales in the Western region jumped 71.9%. Median sale prices rose to their highest levels since July 2008. "We expect housing activity to stabilize in the coming months and gradually pickup as the year progresses," the analysts wrote.

Venture capital investment grew 19% to $21.8 billion in 2010 to post its first gains since 2007, according to the MoneyTree Report by PricewaterhouseCoopers.

The IPO market also continues to heat up, a sign that investor risk appetite is gaining momentum. Issues by Demand Media (DMD) and Nielsen Holdings (NLSN)soared on their debuts Tuesday -- up 33% and 9%, respectively.

The key now is not to let the politically charged environment interfere with the advancing recovery.

GOP in Spin Mode, Too

Based on its official response to the State of the Union address, the Republican party also seems intent on limiting its ambitions to the cosmetic.

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GOP rhetoric about fiscal responsibility aside, the $50 billion that Eurasia Group expects the Republicans cuts from this year's spending to be a drop in the bucket compared to the $1.48 trillion deficit.

"The big takeaway on fiscal policy is that neither the president nor Republican respondent Paul Ryan (R-Wis.) spent much time on entitlements or other large drivers of the deficit," the firm's analysts wrote. Like the White House, "Republicans must convince the public that the limited spending cuts they deliver are meaningful."

Political posturing and grandstanding like the recent visit from China's president elicited will be in abundance. But investors should be thankful that actual measures should be in short supply.

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