State of the Union 2011: Sidestepped Issues

Jan. 26, 2011 — -- President Obama's State of the Union address on Tuesday touched on innovation, education, security and taming the budget deficit through less spending. But there were few details about exactly how he would cut the persistently high national unemployment rate.

Mindful of the long road of negotiations ahead with a Republican-controlled House, the president steered clear of placing a figure on how he'd control military spending, Medicare, Medicaid and Social Security.

"He could have acknowledged the seriousness of the employment situation, including the unemployment rate," said Doug Roberts, chief investment strategist of Channel Capital Research.

Still, observers say the annual address to Congress is more about setting the tone than filling in all the details.

"The speech provides the president an opportunity to set the tone for a less-polarized Washington, one in which there are prospects of Democrats and Republicans working together to address the nation's problems," said Shanto Iyengar, professor of political science at Stanford University.

While the president did not mention new jobs programs, he emphasized the South Korea trade agreement that will lead to jobs and the importance of investing in education. One specific proposal is a tax credit of $10,000 for four years of college.

Roberts pointed out that Obama avoided talking about the nation's mortgage and foreclosure crisis, currency manipulation disputes with China and international banking stability.

"There was minimal focus on deterioration in the economy, trying to give the appearance of a strong recovery," Roberts said.

The "biggest takeaway for investors" from the speech, according to Anthony Valeri, senior vice president of LPL Research, was a possible decrease in the corporate tax rate. Though he said investors will have to wait and see additional details and "concrete action."

"The progress of earnings season will have a greater impact over the near-term for stock investors and high-yield bond investors due to the lack of details," Valeri said.

The president called on Congress not to implement a permanent extension of tax cuts for the wealthiest 2 percent of individuals and to join him in the "tough job" of reforming the tax code.

But Valeri said the tax policy debate will not be an issue for investors this year but in 2012.

"For now, investors will look for signs that tax-cut extension legislation is having a tangible impact on consumer spending and business capital spending," Valeri said.

Jeffrey Kleintop, chief market strategist with LPL Financial, said investors were hoping for additional details on Social Security reform and the proposals of his deficit commission.

The president only mentioned that he hoped for "a bipartisan solution to strengthen Social Security for future generations," while stating that he didn't agree with all of the recommendations of his deficit commission. Last December, the commission made a number of proposals to decrease the deficit, including raising the retirement age to 68 by 2050 and curbing the cost of living adjustment increases.

"The deficit is a top issue on the minds of voters and investors," said Kleintop. "Uncertainty about the federal budget and debt ceiling could start to weigh on the markets as disappointment mounts from ineffective action from Washington."

Obama did, however, call for a five-year budget freeze on non-security related discretionary spending. Last year, he called for a three-year hard freeze on non-security discretionary spending.

"I'm willing to eliminate anything we can honestly afford to do without," said the president, but not on the backs of the "most vulnerable citizens."

As expected by analysts, the president did not dwell on the Republicans' recent vote against health care legislation.

"Now, I've heard rumors that a few of you have some concerns about the new health care law," the president said.

Obama acknowledged that improvements can be made, such as eliminating a tax reporting rule that has attracted the ire of small businesses.

"So instead of re-fighting the battles of the last two years, let's fix what needs fixing and move forward," the president said.

While he did speak broadly about topics relevant to the U.S. economy, Kleintop said the president did not devote significant time to U.S. interests abroad, beyond Afghanistan and Iraq.

"By glossing over foreign policy conflicts with Iran, North Korea, Venezuela, among others fosters the danger that the public will be unprepared for some of the international crises that may heat up in 2011," said Kleintop. "Oil prices are already high, but do not yet have much of a geopolitical risk premium embedded in them. Any shock could have a dramatic impact on oil prices as global excess capacity is already decreasing."