The optimistic spirit that pervaded Wall Street in the wake of President Obama’s inauguration was all too short-lived, as investors reacted to bad news from the housing sector and disappointing news about 5,000 job cuts from Microsoft. All sectors slid downwards in response to government data showing an increase in first time unemployment claims, alongside reports that housing construction had slumped to 550,000 in December— its slowest pace on record. In addition, early earning reports failed to bring any cheer with the S&P 500 posting a 20 percent decline in earnings growth as of January 16. Wall Street analysts (whose projections last September of 50 percent earnings growth have been shown to be excessively bullish) have no reason to expect any improvement as they await further earnings reports from corporate America. When experienced analysts are so far off the mark with earning forecasts, the chance of individual investors uncovering bargains and value opportunities seems unlikely.
The financial sector continues to be a major culprit in keeping the markets on edge by posting bad news. Troubling news from the Bank of America, whose acquisition of Merrill Lynch is proving to be a poor decision, and from Citigroup, underscored the market’s concern about continuing losses, and fears that many institutions may not survive in their current forms.

On the positive side, economists and investment professionals are eager to see Congress pass an $800 billion economic stimulus plan, and they want to believe that President Obama and his team will have the resources to put the nation back on a positive path.

Change won’t happen overnight, but here’s what the pros are expecting to see from the new administration:

• Despite Obama’s best efforts, unemployment will probably keep rising into the next calendar year. However, the administration’s plans should keep the health care, education and “green” energy sectors growing and relatively healthy, and as a result, worthy of investor consideration.
• Restoring the financial sector is not only about pumping money back into the banking systems, but also about restoring much-shaken confidence. Investors, who believe that the new administration will get the economy back on track before matters get substantially worse, will find some contrarian investment opportunities. For example: those who have a strong risk-tolerance may find opportunities to generate investment income by buying investment grade bonds as an alternative to dividend paying stocks. Though— bearing in mind the current spate of corporate earnings disappointments—investors may wish to spread the risk by owning bonds through a diversified fund.
• Fears that the new administration will raise taxes on dividends have subsided. Raising taxes when taxpayers are already stressed by recessionary pressures would be inadvisable from both an economic and a political standpoint. Families with an annual income of more than $250,000 may see the top dividend rate increase—but analysts expect only a small increase, perhaps up to 20 percent from today’s 15 percent rate.

Opportunities will always exist for the bold. Just make sure any adjustments to your investment strategy are appropriate for your level of risk-tolerance and your tax situation. Your professional tax and investment advisors can provide recommendations tailored to your specific needs.