Obama vs. the market

Posted by Marc Hodak on March 5, 2009 under Economics | Be the First to Comment

People are beginning blame the 20% drop in the Dow since January 20th on the Big O.  Barry Ritholtz disagrees.  He says that you can’t blame the first 44 days of stock price declines on Obama if you don’t blame the ’00-’03 bust on Bush.  Point.

There are some differences, though (many differences, actually, but some count more than others).  The market is forward-looking.  In principle, the only thing that will change a market value is new information.

What was the new information driving the market’s drop in Bush’s first few years?

– Bust of the dot-com bubble

– 9/11 attack

– Collapse of Enron, WorldCom, etc.

Bush made various announcements and policy changes over that period that no doubt had some impact on the market, but those three items were the real drivers in that period.  (The war in Iraq was a big deal for which he clearly responsible, but that was accompanied by market gains.)  So, what impact did Bush plausibly have on any of the listed items?

– He can hardly be blamed for the bursting of a bubble that was already inflated when he arrived.

– Only the tin-foil hat set would pin 9/11 on Bush.

– Enron and WorldCom collapsed when hidden frauds that had begun before Bush was elected suddenly came to light.

In other words, none of the new information driving down the market in Bush’s early years could plausibly be attributed to his words or actions.

Now, what major new information has come to pass since Obama took office?

– The President’s articulation of specific policies

– Ever bigger bailouts, budgets, and other legislative initiatives

The credit crunch that spurred many of these policies?  We already knew about that.  Bank problems?  We knew about those, too.  GM’s impending bankruptcy?  Old news.  Rising unemployment?  No surprise.   Basically all the information that could plausibly be tagged to the latter part of the Bush administration was already known by the time Obama took office.  It was presumably, largely discounted the 45% dive from the market’s highs in 2007.  The only thing we didn’t really know on January 20th was what Obama would actually do once in office.  Obama was expertly, impressively vague about particulars during his campaign, and even during the transition.

Once he got into office, though, he had propose or sign off on specific legislation.  Now we are getting a clear idea about his particulars, and one could say that the market appears way less than enthusiastic about them.

But one could also say that the market is messy indicator of these things.  The Dow’s verdict is a terribly imprecise gauge of public policy in the short term.

Less ambiguous, though, is Obama as a market pundit, willing to call the bottom.  He did that three days ago.  So far, it’s been a bumpy ride.