The numbers are stunning. The Dow has dropped 31% since election day and 20% since the inauguration. Many political opponents and some market observers have pointed the finger for this drop directly at President Obama. The President's supporters counter that much of the move has to do with short term market dynamics and an economic downturn he inherited. So far, both the President and his supporters have ignored these short term trends.
So far, the President has cover. After all, he has only been in office for a month and a half. Whatever the movement, it is short term. At some point though, short term will turn into medium term and into long term.
Here is what should concern everyone in the administration, and in the investing community at large. Nothing over the next year will likely happen to change the dynamic of the market. The market has made two verdicts. It doesn't like the long term outlook of the economy. It also doesn't like the policy platform of the Obama administration. Now, defenders will quibble with the second statement, but how are we supposed to view the market tanking following every major policy initiative brought out by the administration.
Now, let's look at the landscape over the next year or so. Today, the employment numbers came out for February and the economy lost more than 600,000 jobs. Even the administration itself expects that the downturn will continue indefinitely. That means we can expect a steady stream of bad economic news for the indefinite future. At the same time, the administration will role out a plethora of new big government, quasi socialistic policies for the indefinite future. Furthermore, President Obama has taken a very anti business tone. If he isn't demonizing big business, he is presenting policies that will punish them with massive new regulations and taxes. Such a tone is not going to make the Dow move in the right direction anytime soon.
So, well have to ask. Are we really to believe that as we learn more about the mortgage bailout, the stimulus, TARP II, cap and trade, quasi bank nationalization, the budget, etc. that suddenly the markets will warm to them? Furthermore, it is clear that the market has lost all faith in Obama's Treasury Secretary Tim Geithner. So, yes, it's early, but why should anyone believe that anything will change anytime soon?
So, let's add up the math. If the market has dropped nearly thirty percent in five months due to a combination of a deteriorating economy and policies it rejects, what do you think will happen if the exact same thing happens for at least another year? At this pace, we may be at 5000 by the end of the year if not sooner. That would of course be devastating to the economy and all investors. It would also be devastating to Obama politically. Folks often point to his high approvals to point out that things like this are irrelevant. That is of course misleading. All presidents have high approvals immediately following inauguration. What do you think Obama's approval will be at the end of the year if it is Dow 5000?
The president and his supporters had better start to pay a lot more attention to the Dow Jones. That's because eventually the fate of the Dow and the president are one and the same. Never has there been a successful presidency, in modern times at least, with a weak Dow. The president and his supporters can continue their political posturing. They can continue to blame the falling Dow on his predecessor. For a while, it may work, but at some point, the Dow had better go up. If the president thinks that a current policy course will make that happen anytime soon, he is deluding himself.
The president has one last chance to change this all around. If he can present some sort of a plan to stabilize the banking system, the markets can and will recover. If he can present some sort of a plan that will once and for all deal with all the toxic assets on the balance sheets of the banks, the markets can and will recover. We can all hold out hope that this will happen, but so far there is no indication that it will.
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