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ETF Center Sponsor Article—The Obama Market: Themes of Change

Issue 5 - April 2009

Article Contributed by Invesco PowerShares
Invesco PowerShares offers exchange-traded funds and is a sponsor of Pershing’s ETF Center.
To learn more about Invesco PowerShares visit: http://www.invescopowershares.com/
or visit Pershing's ETF Center in the tools section of NetExchange Pro®.

Make no mistake: The new face at 1600 Pennsylvania Avenue means change, in an environment that is anything but business as usual. 2008 saw one of the worst declines in global asset values in a generation with record-high volatility.1 The Federal Reserve’s balance sheet has doubled, and the basic organization of the U.S. capital markets is in flux. President Obama’s impact is uncertain—new economic realities will likely delay, or delete, many of the policies Candidate Obama proposed. But those same economic realities mean that the government is primed to take an active role, as evidenced by the recently passed, more than $800 billion stimulus package.2

History teaches that markets can change on a dime. The single best one-year price gain in the history of U.S. equities came from July 1932 to July 1933, when the predecessor of the S&P 500 Index rallied 124%—a figure that would make the dot-com boom blush. Of course, in the 12 months prior to that, you would have suffered the worst decline in history, losing over 65%.3 Whether the markets can produce that kind of recovery in 2009 will depend in part on the activities of President Obama. We believe advisors who can correctly analyze Obama’s proposals can start positioning their portfolios for a potential recovery.

Taxes: The Obama campaign made its position on the current tax situation abundantly clear. Their platform was to “Reverse Bush Tax Cuts For The Wealthy.”4 He also repeatedly called for an increase in the capital gains tax, although whether that increase would be from 15% to 20% or higher was a subject of much speculation.5 Right up until Election Day, pollster Zogby reported that McCain held a lead of 7% among voters who identified themselves as investors going into the election.6 Long term, there’s little doubt that President Obama will be under pressure from his base to raise the tax, but a dramatic increase for the 2009 tax year would seem unlikely. Exchange-traded funds (ETFs) remain a tremendously tax-efficient vehicle for investing. Invesco PowerShares distributed capital gains on less than 1% of its ETFs in 2008.7

Energy: The days of $140-per-barrel oil may be behind us, but supply-and-demand forces are far from stabilized. Both consumption and production are in decline, and uncertainty over which will dominate 2009 prices has analysts calling for oil anywhere from $50 a barrel to $25.8 Either way, the precipitous decline in energy prices makes a windfall tax on oil producers exceedingly unlikely, removing a risk from the traditional energy sector. Obama telegraphed his plans in his “New Energy for America” proposal, a sweeping platform that promises federal focus on green-energy alternatives and reducing oil dependence.9 Many so-called “green” companies rallied pre-election, but have since fallen with the price of oil; oil at $40-per-barrel makes many alternative energy technologies comparatively much less attractive, despite planned government subsidies. As a result, opportunities for investors may be in less-likely sources such as cleaner coal. These sources have been somewhat overshadowed in the mainstream media’s coverage of Obama’s alternative energy plans, but could be real beneficiaries of an Obama administration.

Infrastructure: Much of Obama’s stimulus package will go toward the nation’s infrastructure. As such, investment professionals would do well to pay attention to price-to-earnings ratios and earnings forecasts from reputable analysts, and decide for themselves what is over hyped or under bought.

Defense: Obama was elected with a clearly defined goal of getting American troops out of Iraq as fast as possible, and many pundits believe he’ll curtail military spending quickly. The AMEX Defense Index hit a short-term high on Election Day (at 1,327), only to plummet to the quarter low of 1,038 by Nov. 20, 2008.10 Defense stocks have since traded roughly in line with the market, and most defense industry analysts—while less bullish than they might have been in a McCain presidency—don’t see any dramatic reduction in defense spending in the immediate future.

Financial Services: In the waning days of the Bush administration, massive bailout packages and an increasingly easy Fed defined the tenor of financial services. As Obama made his nominations for key administration positions, he took the opportunity to reinforce his belief that financial services regulators were “asleep at the switch,”10 adding that his administration will “crack down on the culture of greed and scheming” that led to the current economic contraction. The question for investment professionals is whether increased regulation will restore confidence, or if it will be seen as a drag on potential recovery. What does seem certain is that the financial services sector will remain volatile.

President Obama ran a candidacy based on the need for change. What he’s inherited as president is an environment already in the throws of tremendous change. Whether he acts as a continued change-agent, or as a steadying hand, there will be opportunities for investors. The aforementioned themes are likely to dominate the headlines of the investment press in 2009, and following them may be the key to positioning a post-inaugural portfolio.

To find out what exchange-traded funds Invesco PowerShares has to offer you, please visit http://www.invescopowershares.com/.

  1. http://www.cboe.com/
  2. The Washington Post, December 12, 2009
  3. “Irrational Exuberance, 2nd Edition,” Robert J. Schiller
  4. BarackObama.com
  5. cnn.com, August 6, 2008
  6. Zogby International
  7. Invesco PowerShares, December 31, 2008
  8. Merrill Lynch, Goldman Sachs, December 2008
  9. BarackObama.com
  10. Bloomberg, December 31, 2008

Shares are subject to risks including: Small and Medium-Sized Company Risk - investing in securities of small and medium - sized companies involves greater risk than is customarily associated with investing in more established companies.

Invesco PowerShares does not offer tax advice. Please consult your own tax advisor for information regarding your own tax situation.

While it is not Invesco PowerShares intention, there is no guarantee that the Funds will not distribute capital gains to its shareholders.

The Funds are concentrated in a single sector which involves substantially greater risk of loss and price fluctuations than an investment diversified across multiple industries or sector segments.

The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.

The price-to-earnings ratio is the share price divided by earnings per share. The Amex Defense Index is an equal dollar weighted Index designed to represent a cross section of widely held, highly capitalized companies involved in providing systems, equipment and services to the United States government and its allies for the purpose of supporting military, defense and intelligence efforts.

Shares are not individually redeemable and owners of the Shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Units only, typically consisting of aggregations of 100,000 shares.

There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risk similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.

Invesco Aim Distributors, Inc. is the distributor of the PowerShares Exchange-Traded Fund Trust, the PowerShares Exchange-Traded Fund Trust II, the PowerShares India Exchange-Traded Fund Trust and the PowerShares Actively Managed Exchange-Traded Fund Trust.

PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Invesco PowerShares Capital Management LLC and Invesco Aim Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd. Shares are not individually redeemable and owners of the Shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Units only, typically consisting of aggregations of 100,000 shares.

An investor should consider the Funds’ investment objectives, risks, charges and expenses carefully before investing. For this and more complete information about the Funds call 800.983.0903 or visit the website http://www.invescopowershares.com/ for a prospectus. Please read the prospectus carefully before investing.

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