The Obama Market: What's Hot, What's Not

SINCE EARLY ON Nov. 5, the investor class has been chattering incessantly about the multiple impacts, both positive and negative, that Barack Obama will have on various financial sectors come January 20.

They may have it backward.

The young president likely will be the one who takes the buffeting, because financial markets likely will remain confined in the Ben Bernanke intensive-care unit come Inauguration Day.

Nevertheless, among investors perception often trumps reality: Obama's victory has already boosted some health-care plays, because his insurance proposals should increase demand for generic drugs and companies that manage drug benefits. And the mere anticipation of his victory had triggered declines in the securities of coal companies, because Obama has hinted he is against increased use of the dirty fuel until there's a proven clean-coal technology.

Who are the other winners and losers under Obama? Here's a rundown.

Although Obama's prospects sparked the biggest Election Day rally ever -- the Dow jumped 305 points, or 3.3%, on Tuesday -- the gains were more than erased the very next day in the face of bleak economic news. Get ready for more see-sawing. Until the market decides if Obama is good or bad for stocks, and to what degree, volatility is apt to be the norm.

"We will remain in a very sloppy bottoming process," says Stuart Schweitzer, global market strategist for the JPMorgan Private Bank in New York. He predicts big swings in both directions, and well into 2009.

"For now, safety may continue to pay," Schweitzer says.

Domestic and international investors are looking for a sense of Obama's approach to credit problems, and the president-elect could provide one by naming his administration's economic team early on rather than waiting until January.

At the moment, former Clinton Treasury Secretary Lawrence Summers and New York Federal Reserve Bank President Timothy Geithner look like the leading contenders for the Treasury job. However, Obama said Friday he was going to take great care in selecting his Treasury secretary, and that an announcement would be made in weeks, not days. He said he wanted to get the decision right, not make it in haste, which suggests that the field may be wider.

What else can the new president do? With economies around the world under siege, it could be at least a year before any of his fiscal policies dramatically affect stocks.

"We are simply in an ugly situation now and investors are increasingly unwilling to look over the valley to the other side," says Douglas Cliggott, a former JPMorgan strategist who now co-manages the Dover Long/Short Sector Fund.

The stocks of banks, brokerages and other financial concerns, already pummeled this year, could take even more of a beating under Obama, many pundits say. They expect a regulatory backlash that will crimp returns.

Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh, says Obama's Treasury secretary will probably be more neutral toward Wall Street than the current secretary, Henry Paulson, who spent most of his career at Goldman Sachs. The new man, Hoffman says, could be more "punitive" with regulation.

Even so, financial stocks are getting so cheap that they'll be hard to resist. The Standard & Poor's financial index is down about 51% so far this year, trading at 11.3 times '09 earnings, versus a 36.6% drop for the S&P 500. Schweitzer, for one, thinks financials will be among the most attractive sectors when the smoke clears.

Obama has made clear that he wants to bolster the nation's crumbling roadways, bridges and sewer systems, and for that reason municipal bonds are gaining fresh appeal. The Obama administration will likely send increased amounts of grant money to the states, improving their cash flows and allowing them to complete old projects and start new ones, all of which should energize the muni market. Lately, some munis have offered tax-free yields of more than 6%.

Infrastructure stocks are trickier. Cliggott and others warn against buying an industry group like steel, which has been battered by the economy, on the hope that some massive government infrastructure-spending plan would turn it around. Shares of United States Steel (X) are down 72% so far this year.