11.05.08

Sorry Obama, Wall Street Doesn't Care

The new president doesn’t much matter to bankers, as major policy changes are off the table right now.

Honestly? Wall Street doesn't care. Yes, I know that's not the answer anyone wants. People want to believe that Wall Street is obsessing over the presidential race the way most of the country has been. It seems only right somehow, sort of mirrored pathologies. There is a pathology going on, however, but it's much, much stranger.

There is no denying that there is a relationship between presidential elections and the markets. You would have to be delusional to believe that choosing, say, Mao or Mussolini wouldn't cause the markets to implode the morning after. But that's an extreme case. To be somewhat more practically-minded, there is data showing that Democratic presidents are best for the markets. But then again, data also shows Republican presidents turn in the best Dow Jones numbers between the election and the end of the year. And then there are those positive numbers on how Dow Jones returns look for Democratic presidents who control Congress, but only have a small majority in the house. Let's not forget, of course, the cheerfully nuts claim that the main reason the stock market sold off to the point of nothingness in September was that Barack Obama went from being tied with John McCain to having a clear lead in the presidential race.

Wall Street has neatly managed to half-way marginalize President Obama, even if it had to gut itself and the economy to do it.

Should you care about all this psycho-babble data? No. It is small-sample silliness intended to give nonsense the patina of truth, which it isn't. Here is the reality: Markets generally don't know what to make of presidents. Such people rarely do what they say they are going to do, which makes discounting the future difficult; and such things as they do that turn out to matter to markets often have their economic significance missed for years. Who would have thought Reagan would be as progressive as he was, that Clinton would be such an unrepentant free-trader, and that Bush II would be so tone-deaf on economic matters? None of them seemed that way going in, and yet that's what happened. On the other hand, while many people thought that Sarbanes-Oxley was overreach, who would have thought it would lead, in large part, to the near complete disappearance of initial public offerings in the U.S. Even its most scathing critics didn't expect that outcome.

The confusion shows up in fund-raising data. John McCain and Barack Obama raised similar amounts of money from Wall Street $10-million to Obama and $7.5-million to McCain and from the commercial banking industry Obama: $2-million; McCain: $1.9-million. At the party level, things are only slightly more skewed, with Democratic candidates receiving 56% of Wall Street's financial support, while the banking industry tilted slightly toward Republicans. In short, the data shows that the financial services industry banks plus investment firms has no idea which party or candidate it prefers, so it just gave money to them both and hoped things would work out for the best. You could argue, of course, that this was mere favor-currying at work, with companies trying to win friends and influence people no matter which party ends up being in charge. There is some truth to that, but it misses that Wall Street fund-raising parity at the party level is a relatively new thing: the industry used to favor Republicans disproportionately, and now it doesn't.

There are many things on here, including a healthy industry distrust of lying politicians and their promises. But it is mostly something else: Wall Street doesn't believe Obama, and it didn't believe McCain either. While Wall Street worried for a little while about Obama's tax increase promise, his pro union leanings, and his regulatory fervor, it now doesn't really care. Why? Because Wall Street knows that everything has changed, as happens with any battle plan after the first skirmish. President Obama can't raise taxes right now. A tax increase during the most severe U.S. economic downturn in modern memory would be a Depression-class error, the sort of thing guaranteed to get you in the history books, albeit for all the wrong reasons. So it's not going to happen. And it's not just tax increases that markets have discounted from Obama, it's pretty much everything, except for more bank bailouts, some regulatory reform, and one or two major financial stimulus packages. Almost everything else is off the table right now, with Obama having little financial room to do very much.

The same would have been true, of course, of President McCain, had he been the voters' choice. Either way, however, Wall Street has now given the presidential election a good close look and decided that it matters less than ever this time around. The financial services industry's recent collapse has turned to a smoking ruin the U.S.'s already burnt balance sheet, putting President Obama square into fire-fighting with a straw and no money for water. All he can do is try to survive in the face of massive deficits, a teetering economy and a looming social security nightmare. Wall Street has neatly managed to half-way marginalize President Obama, even if it had to gut itself and the economy to do it.