Do the Markets Hate Obama?
Stock markets hate President Barack Obama. The argument was made last Friday on television by columnist Fred Barnes, and you can expect to hear the claim again today if stock markets fall after the Obama speech to the nation last night.
Here is what Barnes said on Fox News last Friday: "Financial markets are a bet on the future in America, and right now financial markets are betting that the future is grim. When markets dropped 800 points since Obama became president, and 2,200 since he won the election, that is a vote of no confidence on his economic policies."
To the extent the markets do anything even semi-predictably, however, they rise on the rumor, and fall on the news.
Radio talker Sean Hannity repeated and expanded the claim on his radio show Tuesday. It required some selective ignorance on Hannity’s part, as, under the spell of Ben Bernanke’s testimony, the Dow was simultaneously re-tracing its Monday losses. Mind you, no one has ever accused Hannity of letting the facts get in the way of a strongly held view.
Nevertheless, Barnes and Hannity cite two data points in making their claims. First, markets are down 11 percent since Obama's inauguration. Second, markets have tumbled on days when the Obama administration has made major economic announcements.
There is no denying that US markets have declined sharply since Inauguration Day. The Dow Jones Industrial Average is in fact off 11 percent since the eve of inauguration, which is awful. Given, however, that the current recession is more than a year old, and the most recent downward cycle didn't somehow start the morning of January 20, we need to put the post-inauguration market underperformance in context.
The credit crisis began its current leg down in September 2008 when Lehman Brothers Holdings went under. Tracking Dow performance from that day to inauguration, the index was down 28 percent. So, while the stock market has done poorly since President Obama took office, it did even worse in percentage terms during the months immediately preceding the presidential change. Should we be arguing that the markets also hate Republicans? Sure, go ahead if you want to, but a more appropriate interpretation is that both parties' politicians are getting pulled out to sea by the biggest economic calamity since the Depression.
How about the second argument, the idea that the market has sold off when the Obama administration has made economic pronouncements? Before explaining why that's a naive position to take in the first place, whatever the party affiliation of the current White House occupant, I'll briefly take it at face value.
Barnes claims the market has fallen twice when the Obama administration made economic announcements. First, he says, it tumbled when Treasury Secretary Timothy Geithner made his non-announcement announcement with respect to a concrete plan for the US banking system. Second, he argues, it tumbled when President Obama signed off on the stimulus bill. Those have been the two planks, so far, of Obamanomics, and the markets were off 4.6 percent and 3.8 percent, respectively on the two days. Ouch!
While I agree that the Geithner announcement was deservedly poorly received, we need context. Consider how the Dow did between September 1, 2008, and the inauguration on days when Treasury Secretary Henry Paulson made major announcements or appeared live on TV defending those decisions. I count ten such appearances over the period (which is remarkable in itself), during which the Dow declined a whopping 23 percent. Not to put too fine a point on it, but you could have run a successful trading strategy last year of simply going short any day that Henry Paulson was on TV, and then spent the rest of the year safely in cash.
But all of this is beside the point: The Barnes/Hannity market model isn't how stock markets work anyway. Markets are, in the short run, a random walk, right up there with Brownian motion of molecules in a coffee cup. To the extent they even do anything semi-predictably, however, they rise on the rumor, and fall on the news. In other words, far from being surprised that two major and widely anticipated Obama announcements saw market declines, a more intelligent take is that things played out pretty much as expected. Saying otherwise is plain dumb, or maybe simply being grotesque and cynical.
While it may be fun to pretend that markets are taking political stands, they generally aren't. Sure, they want this crisis over with, but traders mostly want politicians and political officials to stay the hell out of the financial and economic news. Why? Because in the world of ever-oscillating stocks the most terrifyingly unpredictable thing of all is government of either political stripe on live TV making financial announcements.
Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.