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Saturday, February 21, 2009

President Obama Vs. the Stock Market II

Last summer, I wrote about what then candidate Barack Obama's policies would do to the stock market. That particular post has seen a resurgence mostly through Google searches, but it is also rather outdated. At the time, candidate Obama had several policies based on a populist platform and a weakening economy. Most of that has changed, and many of the policies that candidate Obama touted in the summer have gone by the wayside. For instance, he floated a capital gains tax increase, a corporate tax increase, as well as an increase in taxes on the top tax bracket. All of that has been tabled for now. Still, the early returns, from the stock market, on President Obama's policies have been decidedly negative. So, why is this happening? In fact, much of this is outside of President Obama's control. The economy is in a tailspin and the market is responding to that weakness. Beyond this though, the market is, so far at least, rejecting a lot of his policies and rhetoric. Here is the complete analysis. First, the market is down about 20% since his election and almost 900 points since his inauguration.

1) The weak economy.

I would say that the biggest factor in the decline of the market under President Obama has nothing to do with President Obama. It is entirely due to a never ending stream of bad news. One of the problems with this weak economy in this time period, is we now have access to an endless stream of number. Whether it is housing, manufacturing, consumer confidence, unemployment, there is literally a new economic number that comes out every single day. So far, every single number is bad. Now, where is the market supposed to go when for months and months every single economic number, coming out nearly daily, is bad. Is it any wonder that the market is down 20% since his election? Is it any wonder that the market is down almost 900 points (as measured both by the Dow Jones Inustrial Average) since inauguration? There isn't much a President can do to stabilize the markets when every single day there is a new economic number that tells us the economy is horrible.

2) Geithner's egg.

Ever since Secretary Geithner's disastrous speech about the bank bailout, the market has turned on the Obama administration in a big way. President Obama is supposed to be the talented and charismatic politician. It was Geithner that was billed as the financial genius. President Obama would sell the financial plans and navigate the political waters. It would be Secretary Geithner that would be the genius behind creating the nuts and bolts of these plans. Remember, we were all lead to believe that his tax snafus needed to be overlooked because he was a one of a kind and unique financial mind. Then, he spoke and the markets started to wonder if rather than being uniquely qualified, he was qualified at all. The speech was first delievered horribly. He looked weak and nervous. Second, it was full of vague platitudes. It was, frankly, the sort of speech that President Obama would deliver as candidate Obama. The market wanted specifics and instead, it got vague allusions to general concepts that frankly, anyone could talk about. Since then, the market has shown a frightening weakness.

3)Too much fear mongering.

In one speech, President Obama used the word "crisis" over twenty times. We all understand that this doom and gloom is used for Political purposes to sell his plans. Of course, one of the many side effects of fear mongering is that it spooks stock markets. That's exactly what has happened. There is a certain threshhold on words like "crisis", and of course that threshhold was passed long ago, until markets respond very badly. President Obama would be wise to temper down words like crisis or he will face what is known as a self fulfilling prophecy. The markets have heard the word crisis quite a lot out of the President's mouth and it should surprise no one that they have turned in the direction of crisis.

4) Anti free market policies.

At its core, the stock market is most of all a MARKET. A market is the finest in unadulterated capitalism and most of all (as is embedded in the word) a FREE MARKET. Markets don't respond to massive government spending, bailouts, and hyper regulation. They respond to tax cuts and deregulation. Markets believe in themselves and the principles they are founded. Let the free market take course. Stay out of its way and the market will respond positively to that. Intrude, and the market will respond negatively to that.

I predicted a while back that the Dow would eventually hit 5000. That's likely where it is going. President Obama has decided on policies that markets will continue to reject and reject. The market rejected the stimulus. Of course, it did. Markets don't want a plethora of government spending that is either borrowed, printed, or even worse taxed. The markets rejected the mortgage bailout. Of course, it did. Markets like for markets to be allowed to work. This is an intrusion in the natural course of free markets. We still have President Obama's new regulatory framework that will eventually be unveiled. A plethora of new regulations will be as roundly rejected as most of President Obama's other policies.

President Obama could change the course on these markets with a few simple things. First, the announcement of a serious tax cut, be it across the board income tax cuts, corporate tax cuts, or even capital gains tax cuts would be viewed very favorably by the markets. Second, Secretary Geithner needs to redeem himself and soon. He needs to get back in front of the cameras quickly, give us details, and do it confidently. If the markets believe that there is someone in charge that knows what they are doing, they will respond very favorably. Finally, the doom and gloom must end. There is only so much anyone can take. It is shocking, and frankly incompetent, that a President would use the word "crisis" over twenty times in a speech. There are ways to present the situation as it is without making it seem hopeless. Right now, it seems hopeless. Without all three of these things though, I am afraid I will be tooting my own horn soon...Dow 5000.


David said...

Doomsday advice: if the economy collapsed (op, did I say that?) and you couldn’t buy toilet paper what would you do? Get a bathroom bidet sprayer from and you won’t have to worry about it. The water will still be running long after the toilet paper stops reaching the store shelves and in the mean time you’ll be saving money that you can use to stock up on canned soup.

StarWolf said...

You conclude that the "market" rejected the stimulus because it tanked even further in recent days, as the stimulus was passed and signed. But I think the primary reason it went even further down is something else that happened over the last few days-- it has become clearer and clearer that we are going to have to do a partial nationalization of the banks. Obama and Geithner are saying "no, no, no" to this, but the banks shareholders realize that is just politcal-speak, as a growing number of reputable economists and experts are coming to the conclusion that it will have to be done, at least on a partial and temporary basis (and it probably will be called something else). And the shareholders realize they would be wiped out if that happens--so hence the further fall of the DOW.

ptk11 said...

How Can There Be any Doubt About Why The Market Continues To Sink?

Read the following Investor's Business Daily Editorial

Hypothetically, if Obama had withdrawn from the Presidential race in May 2008, and either Hillary or McCain had won, we would not be where we're at today.

The mortgage "crisis" was a problem that could have been solved if Senators (Dodd, Schumer) and Rep.Barney Frank, had not made statements in early September that created an avalanche.

From May 2008 onward, businesses recognized that the American way of life was, with the implementation of Obama and a Democrat-lock on Congress, about to come to an end.

Higher taxes, higher costs of doing business, vilification of anyone grossing over $250k and redistribution of wealth was imminent. Job creation was backburnered.

I believe the Feds and State governments know far more about how bad it is than they're revealing. Income tax withholding is a telling indicator, and as more people are no longer employed, the monthly withholding revenue is dropping significantly. Yet today's Washington Post describes Obama's imminent budget proposal which is bed-rocked on increasing taxes on higher-income people.

This past week, NY Mayor Bloomberg implicitly objected to the NY State Gov't plan to increase income taxes on those earning $250k or more. Bloomberg noted that 1% (40k) of taxpayers in NYC pay 50% of the taxes; 52% don't pay any taxes, and 30% get a credit. 17% of NY taxpayers paid the remaining 50% of NYC taxes).
It has been suggested that if just 10,000 of the high-paying taxpayers moved out of NYC, NYC would die!
They ought to be being treated like royalty; instead, they're trashed and maligned. Those 40,000 New York upper-income taxpayers are the ones who Obama views as the enemy targets. These are the people on whom Obama and Congress want to put a $400k pay cap.

It's going to get a lot worse, and I don't expect it to get better in the next 20 years (it took America 20 years and a War to recover from Roosevelt's wrong economic policies).

An entire generation of potential investors have been soured on stocks as an investment, and there's concern among many regarding the safety of banking institutions.

Anonymous said...

Don't you feel like a complete moron now? You should.