NOW: Political strategist is bullish about economy

Greg Valliere, senior vice president and chief political strategist at the Washington Research Group, says the stock market rally of the past few weeks is not an illusion and is a harbinger of good things to come.

“Last year I was very cautious,” Valliere told a conference that was hosted by SVA Wealth Management Inc. at its office in Brookfield recently. “Today, I’m quite bullish. I think the climate for investors is quite encouraging.”

Valliere is a regular co-host of CNBC’s Squawk Box and a frequent guest on the network’s Market Wrap show, CNN’s Business Day and the Nightly Business Report, which appears on most PBS stations.

Several factors, including low interest rates and the current low inflation rate, point to “fairly decent economic growth,” Valliere said.

“I look at the fundamentals,” he said. “You have to say things look much better. I think we’ve dodged a major bullet (with the recession). And I think there’s still quite a bit of money on the sidelines.”

The stock market has gained significant ground since bottoming out earlier this year, and the run-up should continue, Valliere said.

“I think a modest correction is possible at any time, but I think it would be short-lived,” he said. “I think the climate for investors is quite encouraging.”

Some concerns that remain with the U.S. economy include the commercial real estate market and the job market, Valliere said.

“Commercial real estate is not out of the woods,” he said. “(And) unfortunately, the unemployment rate is going to stay higher. We’ve got another six months to go of very weak employment data. Because of that, consumer spending is going to stay very modest. That’s the strongest argument that the recovery will not be as robust as previous recoveries.”

In addition, the country’s residential real estate market has bottomed out, Valliere said, but “is not going to spring back.”

Because of concerns about a W-shaped recovery with a second downturn, the Federal Reserve will keep the federal funds rate at zero for another year, which should stoke the economy, Valliere predicted.

The market has overcome its fears of the Obama administration, Valliere said. Many of Obama’s initiatives, including health care reform, financial industry reform and “cap and trade,” have been delayed and will ultimately be watered down or will not pass at all, he predicted.

“We’ll have a modest health care bill,” Valliere said, commenting on the hottest issue of the day. “There is a chance the whole thing will fall apart.”

Taxes are a much bigger concern for the economy and for investors than health care reform, Valliere said. The tax cuts signed by President George W. Bush for individuals making more than $200,000 annually and families with incomes of more than $250,000 annually will almost certainly be allowed to sunset, he said. Capital gains and dividends tax increases are also expected.

“Increasing taxes on the biggest consumers will dampen economic growth,” Valliere said.

However, the growing federal budget deficit also will place pressure on Obama to consider breaking his promise to not raise taxes for people who make less than $200,000 a year and families with incomes of less than $250,000 a year, Valliere says.

“It’s an expensive promise to keep, $2 trillion over 10 years,” he said.

The massive federal budget deficit is a concern for the long term, but not for the short term, Valliere said.

“There’s been a lot of unwarranted hysteria,” he said. “In the short term, government spending has been the major reason we avoided a depression. At some point, do we have to worry that foreigners will stop lending to us? We’ve heard that for 30 years, and it never happens.”

Although the Obama administration recently imposed a tariff on tire imports from China, Valliere doubts the U.S. will get into a trade war with China, despite America’s large trade deficit and concerns about the outsourcing of manufacturing jobs overseas from states like Wisconsin.

“At the end of the day, (Obama) is not going to put up a big fight with China,” Valliere said. “We need China too badly to keep lending us money.”

Instead of government protectionism, the weakening U.S. dollar could provide a boost for Wisconsin manufacturers, he said.

“The weak dollar will cure a lot of the ills,” he said.

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