Wall Street likely to shrug off Obama as investors wait for budget deal

NEW YORK (Reuters) - The US stock market is unlikely to take much direction from Tuesday's State of the Union, although President Barack Obama was less combative in his tone than some on Wall Street expected.

Mr Obama's speech provided little in the way of guidance as to whether the White House and Congress will come to a deal to head off large spending cuts that are set to come into effect as of March.

The broader market has not been overly concerned about the potential effect of US$85 billion (S$105 billion) in automatic spending cuts that would hit the defence sector hard.

The president presented a number of new initiatives - including a proposal to raise the national minimum wage to US$9 an hour - but the difficult path many proposals face in getting through Congress means reaction from individual shares will likely be muted.

"The State of the Union address by the president should not be impactful to the markets," said Mr Doug Kass, founder of hedge fund Seabreeze Partners Management Inc in Palm Beach, Florida.

The equity market has rallied sharply in the first six weeks of 2013, in no small part as a result of the deal cut to avoid the "fiscal cliff" and the Republican House's subsequent decision not to use the debt ceiling as a bargaining chip for spending cuts.

Headed into the speech, S&P 500 futures were up marginally, and barely moved during the course of Mr Obama's address.

Mr Obama urged a resolution to the budget battle over the so-called sequester, the package of automatic spending cuts scheduled to take effect at the beginning of March. However, the two sides are currently far from a compromise.

If lawmakers do not come to an agreement over the cuts, it will reduce federal spending across the board by about US$85 billion for one year. The cuts would be split between military and domestic programs.

"Neither side particularly wants the sequester, but the process of getting from here to there will probably be painful to watch, just like the fiscal cliff was," said Mr Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The philosophical divide over whether to reduce the deficit through raising taxes or cutting spending still stands, said Mr Hellwig.

Most State of the Union speeches see less than a 1 per cent move in the stock market on the following day. The average move is only 0.15 per cent since 1934, according to LPL Financial.

The energy and gas sector might see a short-term bump from the speech. Obama pledged to cut red tape to encourage more drilling for domestic natural gas, while also vowing to push for more and cheaper solar and wind energy.

"To me, the biggest news was it seemed to embrace the energy revolution more so than to trying to control it," said Mr Hellwig.

Still, those stocks may not see a pop tomorrow because the speech is typically seen as being geared toward policy rather than specific proposals, said Mr Hellwig.

"Looking at futures, what they're telling me is all this is in the market," he said.

Although Mr Obama backed a US$50 billion programme to fund infrastructure rebuilding projects such as fixing aging bridges, many Republicans are adamantly against such stimulative government spending, which could temper any potential upside for stocks such as Caterpillar Inc, the world's largest maker of construction equipment.

Similarly, analysts said the effect of the president's proposal to raise the minimum wage for workers from US$7.25 to US$9 an hour is likely to be ignored. Companies with large workforces at the lower end of the pay scale - such as McDonald's Corp and Wal-Mart Stores Inc - could be vulnerable to a hit in their stock but Republicans typically oppose increases in minimum wage.

"If you raise the minimum wage 20 per cent and index it for the cost of inflation, that will significantly impact the profitability of companies," said Mr Michael Yoshikami, CEO and founder of Destination Wealth Management in Walnut Creek, California.

"There might be a small reaction tomorrow but it will be very temporary because in the end most people probably recognise this is more posturing than anything else."

Join ST's Telegram channel and get the latest breaking news delivered to you.