Market Took Fastest Drop Under A New President In 90 Years

Bloomberg is reporting on the market numbers and how it has taken the fastest drop under a new President since Herbert Hoover.

‘Obama Bear Market’ Punishes Investors as Dow Slumps (Update2)

By Eric Martin

March 6 (Bloomberg) — President Barack Obama now has the distinction of presiding over his own bear market.

The Dow Jones Industrial Average has fallen 20 percent since Inauguration Day, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge has lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

More than $1.6 trillion has been erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse. The president is in danger of breaking a pattern in which the Dow rallied 9.8 percent on average in the 12 months after a Democrat captured the White House, according to data compiled by Bloomberg.

“People thought there would be a brief Obama rally, and that hasn’t happened,” said Uri Landesman, who oversees about $2.5 billion at ING Groep NV’s asset management unit in New York. “It speaks to the carnage that’s in the economy and the lack of confidence in the measures that have been announced.”

A bear market is defined as a decline of 20 percent or more.

Buying shares “is a potentially good deal” for long-term investors, Obama said March 3. He compared daily fluctuations to a tracking poll in politics and said he wouldn’t adjust his policies just to meet market expectations.

Congress last month enacted Obama’s $787 billion package of tax cuts and spending on roads, bridges and public buildings. His 2010 budget indicated the government’s financial rescue may need another $750 billion after an initial $700 billion.

Getting Cheaper

The Dow average has dropped 31 percent since Obama’s election. The 30-stock gauge trades at 8.04 times annual earnings, the cheapest since 1995 and down from 10.06 times on Inauguration Day.

Citigroup Inc. led the plunge, losing 71 percent. The government proposed taking a 36 percent stake in the New York- based bank, cutting the percentage owned by shareholders. Detroit-based General Motors Corp. tumbled 53 percent after the largest U.S. automaker said it needs more government aid.

“It’s the Obama bear market,” said Dan Veru, who helps oversee $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. “We don’t know what the rules are in so many different areas the government is touching.”

The Dow average lost 0.3 percent to 6,577 as of 11:14 a.m. in New York today.

Bank Losses

The U.S. economy contracted at a 6.2 percent annual rate in the fourth quarter, the most since 1982, the Commerce Department said last week. Unemployment jumped to 7.6 percent in January, the highest since 1992, as Americans fell behind on their mortgages and banks seized homes at a record pace.

Losses at financial companies worldwide that grew to about $1.2 trillion sent the Standard & Poor’s 500 Index to a 38 percent retreat last year, the steepest since 1937.

“Prospects for recovery in the financial sector, despite all the government help, still seem rather remote,” said John Carey, who manages about $8 billion at Pioneer Investment Management in Boston. “We’ve had a weak economy for a couple of years, and we aren’t seeing the stimulus working at this point. That is what weighs on investors’ minds.’’

The Dow average took eight months to decline 20 percent following the inauguration of George W. Bush, reaching the level on Sept. 20, 2001, nine days after terrorists attacked the World Trade Center in New York and the Pentagon in Washington.

Herbert Hoover

The crash of 1929 occurred seven months into the administration of Herbert Hoover, who presided over an 89 percent plunge in the Dow between September 1929 and July 1932, the steepest retreat ever.

Only twice has the benchmark gauge slipped in the 12 months after the election of a Democratic president since 1900, after Woodrow Wilson’s victory in 1912 and Jimmy Carter’s in 1976.

The Dow entered its most recent bear market on July 2, 2008, when a 167-point decrease gave it a 20 percent loss from its record 14,164.53 on Oct. 9, 2007. Unlike the Standard & Poor’s 500 Index, the Dow’s rally from its November low of 7,552.29 fell short of a 20 percent bull market gain, ending at 19.6 percent.

“Obama should be listening to the stock market more than talking to it,” said Kenneth Fisher, the billionaire chairman of Woodside, California-based Fisher Investments Inc., which oversees $22 billion. “He hasn’t gotten out of the gate well.”

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net .

Last Updated: March 6, 2009 09:51 EST

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Obama And The Stock Market

John Wohlstetter from Letter from the Capitiol has a post up detailing how the stock market is reacting to Obama’s policies and actions.

March 04, 2009

Obama’s Stock Market: Investors Vote With Their (Financial) Feet…Exit!

A WSJ editorial sums up the detritus of 44’s first days by looking at the collapse of the Dow Jones Industrials this year.  As of January 2 the Dow closed at 9o34, its highest level since the autumn panic plunge.  It closed at 6763.29 Monday, March 2, a 25 percent plunge (from January 19’s 8279.63 close the DJIA has fallen more than 18 percent).  Economist Robert Barro sees a 20 percent chance of a crashing market bringing about a depression (technical economist definition: a drop of 10 percent in GDP or consumption).  Since 1870 America has seen two depressions: 1917 – 1921, with a 16 percent macro-economic plunge, and the 1929 – 1933 Great Depression, with a 25 percent plunge.  (Barro doesn’t count the 1937 – 1938 “Depression within the Depression” period, when indicators fell back to near-1933 levels.)

Here are key DJIA metrics from Nov. 3 through March 2 (four months) that collectively flesh out the picture (I made two minor corrections–the date Obama was elected & one spelling miss):

November 4, 2008: Obama is Elected
November 4, 2008: 9326.04 Open
November 4, 2008: 9139.28 Close

January 20, 2009: Obama is Inaugurated
January 20, 2009: 8,279.63 Open
January 20, 2009: 7,920.66 Close

February 17, 2009: Obama signs stimulus package into law.
February 17, 2009: 7,845.63 Open
February 17, 2009: 7,502.59 Close

February 27, 2009: Obama announces budget
February 27, 2009: 7,180.97 Open
March 2, 2009: 6763.29 Close

Let us then trace the (rounded) numbers from 9326 to 6763. On Election Day the market fell nearly 200 points, a 2 percent drop.  From there to January 2–the first trading day of 2009, after a smooth transition, when Obama as President-Elect had appointed moderate economic advisers–and with Bush 43’s Detroit rescue depriving his remaining days of any market credibility, thus permitting investors the “audacity of (financial) hope”–the market fell another 100 points, but remained well above the nadir of autumn, and above (see WSJ chart) the 7500 low in that period.  On January 19 the market closed at 8279, about 9 percent lower than January 2.  Since January 19, to March 2, the market has fallen another 18 percent.   (March 3’s 10-point move was statistically irrelevant, so I did not adjust the numbers this AM.)

Divide these metrics into two periods, for simplicity: Nov. 3 close – Jan 19 close, from 9326 to 8279, down 5.6 percent; 8279 Jan. 19 close to 6763 Mar. 3 close, down another 18.3 percent–to a full 10 percent below the 7500 transition period bottom.  Thus, the DJIA has fallen more than three times as much (18.3 percent is 3.26 times 5.6 percent) since 44 was inaugurated than during his transition.  This second fall took 6 weeks, versus 11 weeks for the first fall during the transition; this equate to a 6 times faster fall in value since Obama took office, adjusted for the different duration of the two periods.  This makes sense, because a moderate transition has been followed by a left-wing blowout in President Obama’s first 6 weeks.

The WSJ editors point to “sources of recovery” already at work, but that have failed to lift the DJIA:

The price of oil and other commodities have fallen by two-thirds since their 2008 summer peak, which has the effect of a major tax cut. The world is awash in liquidity, thanks to monetary ease by the Federal Reserve and other central banks. Monetary policy operates with a lag, but last year’s easing will eventually stir economic activity.

Housing prices have fallen 27% from their Case-Shiller peak, or some two-thirds of the way back to their historical trend. While still high, credit spreads are far from their peaks during the panic, and corporate borrowers are again able to tap the credit markets. As equities were signaling with their late 2008 rally and January top, growth should under normal circumstances begin to appear in the second half of this year.

Yet the beginnings of recovery elude us.  The WSJ details the policies of Team 44 & a liberal Congress that punish producers & investors & lenders, while rewarding non-producers, non-investors & borrowers.  Investors are on a capital strike, voting “no confidence” in Team 44’s nostrums.  AIG’s fourth taxpayer capital infusion does not do wonders for investor confidence either.  Nor does the confidence offensive launched by Team 44 help; verbal reassurance brings to mind the chaotic “Animal House” final scene, when as the Delta tank rolls downtown and marbles spill all over the pace, one ROTC guy screams: “Everyone remain calm.  Everything will be alright….”  Presidents are rarely good sources of market advice.

WSJ pundit Holman Jenkins fingers government intervention as a major cause of investors going on strike:

Investors don’t have to put their money in any particular company’s stock, or in stocks at all — and the wholesale flight of investors from bank stocks has put almost the entire weight of recapitalizing the financial sector on the taxpayer.

Shafting Citi’s preferred stockholders by forcing them to convert at a loss to common stock sends a signal to investors to stay away from equity ownership where government invests and can (inevitably, will) run the enterprise with political considerations put before economic value creation.  And now FDIC Chairman Sheila Bair wants to draw $27B capital FROM banks to shore up FDIC, whose “funds” are (like the Social Security & Medicare “trust funds”) an accounting fiction!!  She would dun banks by increasing the premium they pay for FDIC insurance.  True, as the WSJ editors note the sum is a fraction of the $4.76TR in total deposits covered by FDIC, but why draw ANY capital away from banks and thus reduce their lending base, when we want banks to lend more?

As for 44, yesterday, as noted by Bill Kristol, he said not to worry.  (I would say that 44 gave us an Alfred E Neuman “What me worry” moment):

“What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. You know, it bobs up and down day to day. And if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”

44 continued:

“Now, having said that, the banking system has been dealt a heavy blow. It has to do with many of the things that Prime Minister Brown alluded to: lax regulation, massive over-leverage, huge systemic risks taken by unregulated institutions as well as regulated institutions. And so there are a lot of losses that are working their way through the system. And it’s not surprising that the market is hurting as a consequence. In fact, you know, I think what we’re seeing is — is that as people absorb the depths of the problem that existed in the banking system, as well as the international ramifications of it, that, you know, there’s going to be a natural reaction.”

Kristol observes that the “natural reaction” began last fall, and thus the steeper drop since January 20 is a (natural) reaction to Team 44’s policy moves & statements.  And yes, markets do fluctuate.  That is all one can say for certain about the future–markets fluctuate.  But when people see their 401k become a 201f, with the plausible prospect that soon it will become a 104c, they get worried.  Thus Kristol writes: “No, the stock market isn’t like a tracking poll. Tracking polls were just about the electoral prospects of Barack Obama. The stock market is about real money, about the real livelihoods of real Americans.”  President 44 needs to worry more about it.

At bottom is a nugget from the 2008 Democratic Presidential debate in which ABC’s Charles Gibson pointed out that recent capital gains tax cuts had generated more revenue for the Treasury, while capital gains tax hikes had produced less, and thus did candidate Obama really wish to raise them, when deficit reduction was a major goal of his?  To which, astonishingly, Obama answered that he would raise capital gains taxes even if the result produced less federal tax revenue, in pursuit of redistributive fairness.

There you have it.  After making moderate noises throughout the transition and appointing relatively centrist economic advisers, Obama turned to the ultra-left Democratic leadership in Congress to write his proposals.  And he embraced the result as his own.  Now the stock market has voted on the result: Investors have voted with their financial feet, running for the exits.

Steve Forbes sees Washington v. Wall Street coming to a head soon, with one view (growth first) or the other (redistributive “fairness” first) prevailing.

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Obama’s Economy Rhetoric

John from Letter From The Capitol has a good article about the economic rhetoric we keep hearing from the mouth of the Obama Administration.  The short version is that, statistically, the current economic conditions aren’t “the worst we’ve seen since the Great Depression”.

February 19, 2009

Economy Rhetoric: Confident 44 Should Cool It

Economics professor Bradley Schiller documents how much worse the Great Depression was than today’s economic misery and calls on President 44 to cool it.  We have numbers now much closer to 1982–perhaps 1973–than 1933.  Author Anne Applebaum notes world trade figures for the Great Depression and notes that world trade declined 66 percent between 1929 & 1934.  Nonpareil business historian John Steele Gordon places America’s national debt figure in perspective.

Essayist Joseph Epstein sees reality making a rendezvous with Team 44 in short order:

Promises, promises, as the Burt Bachrach song had it; unkept, they come back to bite a man. Obama’s promise of a new bipartisanship hit heavy water as soon as his stimulus-package debate was set adrift. For one thing, only the idea for a stimulus package—but not the package itself—ever felt as if it were really his. From the outset it was instead the work of that fun couple, maestros Nancy Pelosi and Harry Reid, the Frick and Frack of heavy federal spending. And those two are as interested in bipartisan participation as Lord Byron was in marriage counseling. When the going on the package got rough, Obama said, in effect: “Well, I won the damned election, so we’ll do things my way, though of course I still invite bipartisan participation.”

Epstein sums up Team 44’s failings and the impact upon the public:

Victims of the general ineptitude that the Obama administration has so quickly shown are transparency in government and the new (we hardly knew ye) bipartisanship. The stimulus package itself is felt to be suspect.

Which brings us back to disappointment and politics. It is in the nature of politicians to make promises; it is what they do. Some do so without the least intention of delivering on their promises. Some fully intend to deliver, but find the world obdurate, unwilling to go along with their fine intentions. Barack Obama now finds himself among the latter. With loony jihadists threatening from without, a crumbling economy terrorizing its citizens from within, Obama knew he needed straightaway to demonstrate utmost competence to stem fear and instill confidence. The reason for his wanting to assemble an able cabinet more quickly than any other administration in recent history was to show that, though the nation had major problems, they were under study and would soon be attacked by the most capable minds of our time. He needed to calm the country down, and show, in a measured but forceful way, that a strong hand was at the wheel.

Things could get a lot worse, however, and talking things down to avoid future political blame could cause more economic misery than we need suffer.  Last fall, amidst a global financial panic, talking disaster was essential to spur immediate action.  Now, with no global panic, merely global gloom, rushing a stimulus bill through by stampeding public opinion was a bad idea.

Robert Samuelson examines Japan’s “Lost Decade” and finds that after the housing & stock market bubbles collapsed, Japan experienced not depression, but sub-par growth, with only two years in recession.  Japan failed to generate new sources of growth to re-ignite its economic engine.  America’s task is to find new sources of growth to replace its failed model.  More lessons from Japan are found in a New York Times piece filed from Tokyo.  A prominent liberal, Richard Florida, sees the 2008 Crash re-shaping America in a way that favors major urban centers within key regional areas, to the disadvantage of suburbs and rural areas.

Much of this is conjecture.  What is clear is that the world economy is undergoing a massive asset re-pricing and de-leveraging.  Until this process plays out, a big-time recovery is simply not in the cards.  But 44 must try to avoid making things worse.  Yes, he must speak candidly.  But warning of catastrophe if his bills are not passed is appealing to the fears he derided during the campaign.  Frank talk need not be fearful talk.  Firm resolve in the face of adverse circumstances is more like what we need to hear from 44.

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