Breakdown: Politics and Stock Markets in the Age of Obama
Insta and Say ask why the stock market has done so poorly since Obama was elected. Day 1 I chalked up to coincidence, as the market had fared reasonably well on Election Day itself, and surely investors weren’t in Limbaughesque denial about how the election was going to go? But after a second straight day, with no obvious extraneous events to explain, I can’t help but wonder if Tuesday’s rally depended on two types of denial rather than one. Some investors, the Limbaughs of the world, continued to delude themselves into believing McCain would pull an upset even though every single poll in the country indicated otherwise (I too had advocated methodological denial, but the idea behind that was to vote as though McCain might win, not to throw good money at that prospect). The others saw Obama as a reflection of their hopes and the change they need. Sure, they knew he’d run on a far left platform, but they figured that was just his campaign rhetoric. Once the election was over, he’d return to earth and start talking sense instead.
Only he didn’t.
November 7th, 2008 at 8:52 am
Well, socialism is a concern ….
November 7th, 2008 at 9:24 am
To suggest that the stock market tanking and Obama’s victory was a coincidence is to suggest that investors do not project a financial future for the companies they buy when making trading decisions. Certainly there are many other bearish factors, but the noise out of Washington right now is thoroughly statist. That’s not going to be good for anyone in the long run.
November 7th, 2008 at 9:40 am
The capital gains tax is headed up in 2009. That alone is going to put a lot of selling pressure on the markets.
November 7th, 2008 at 9:51 am
I’m not sure that Wednesday was pure coincidence — personally on Wednesday I sold a stock that I was planning to sell for a loss before the end of the year anyway just as my small statement of what I thought the election meant. Now did my teeny tiny transaction (less than 100 shares) move the market — not hardly. But were there millions out there like me?
Now to be fair — the fact that the stock was up a few bucks on Monday and Tuesday and I expected the market to fall on Wednesday did play into my decision.
November 7th, 2008 at 10:09 am
Xrlq:
Your opening links are dead here, might want to fix them.
November 7th, 2008 at 10:14 am
The market experts on The News Hour last night had a more mundane take on it: that the election was simply distracting a lot of investors, who weren’t paying full attention to how bad things really are. Now that the election is over, they can turn their full attention and say “oh, crap.” And even if you don’t buy that, some truly awful retail sales figures were released yesterday, and some even worse employment figures are expected to be released today. (Note, too, that a lot of institutional investors know about these numbers before they’re released publicly.) These things have a lot more to do with the market’s behavior than anything having to do with who won/lost elections.
November 7th, 2008 at 10:59 am
As a believer that markets eventually find their proper level but may in the short run overrespond to emotional factors, I would say that we don’t have enough data to claim a pattern.
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November 7th, 2008 at 11:12 am
After reading the humorous bon mot “sell stocks, buy guns and canned goods if the Dems are elected” all summer, I was certainly someone who fled the market due to politics. (And glad I did!)
No idea how many more of us there were.
November 7th, 2008 at 11:12 am
Stock market tanking – “Ridiculous, no correlation, can’t possibly be Obama.”
Gun sales skyrocketing – “Yes absolutely it’s Obama.”
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November 7th, 2008 at 11:28 am
I think the markets had priced in a likely Obama victory as well as recession. That was the huge drop of the last few months.
On election day, the last bit of hope McCain would win evaporated and markets fell a bit on that.
The next day, Obama signalled 4 years of bitter partisanship ahead by appointing the Karl Rove of the left as his first and most important Cabinet member — as you said, he didn’t come back to earth.
Of course, tying any market movement to one specific event is generally a fool’s game given there are so many interdependent factors at work. But this seems likely to have been one of the biggest factors, as Obama was a bit of a cipher given his many contradictory promises.
November 7th, 2008 at 11:38 am
“These things have a lot more to do with the market’s behavior than anything having to do with who won/lost elections.”
Although on the other hand, the policies of who won/lost elections just might. Confiscating more of the investment gains and dividends from investors might encourage them to move their money to where the risk/reward ratio is a little more favorable.
November 7th, 2008 at 11:41 am
Many people wnat to reduce their stock holdings during 2008 because they fear the Dems will raise cap. gains taxes in 2009.
November 7th, 2008 at 12:06 pm
Lots of earnings reports came out and the Bank of England cutting 1.5 points was HUGE news.
November 7th, 2008 at 12:32 pm
tgr: So your argument is that investors are easily-distracted idiots? 8)
November 7th, 2008 at 2:17 pm
DensityDuck:
Well, not specifically my argument. It’s Hugh Johnson’s argument.
November 7th, 2008 at 2:19 pm
willis:
Confiscating more of the investment gains and dividends from investors might encourage them to move their money to where the risk/reward ratio is a little more favorable.
But doing so now would mean selling low after having bought high. We have a name for investors who buy high and sell low: Dumb.
November 8th, 2008 at 7:43 am
tqirsch says: “[Selling now...] would mean selling low after having bought high. We have a name for investors who buy high and sell low: Dumb.”
True enough. I would only caution that there is room _below_ Dow8900….there are years of defaulting mortgages in the pipeline….a pipeline of layoffs is building as we type…productive people are deciding whether to bother… stuff like that.
November 8th, 2008 at 7:52 am
Another “dumb” attitude is one I see expressed where I work “as long as I don’t sell, there is no loss”.
I know that the left-blogosphere is convinced the problem is due to bush/capitalism/glass-steagall/deregulation. Just sayin’ that there is a significant percentage of investors who think this is due to fannie-freddie/ACORN/NINJAloans/Dem-politicoes.
We can argue who’s correct but my point is that there are people, lots of people, who believe that the folks who created this problem are being tasked with “fixing” the problem. And it’s a fact that some number of those people are voting with their wallets and moving money out of stocks.
November 8th, 2008 at 8:42 am
We also have a more accurate name for the practice: cutting one’s losses. We also have a name for the cheap line of reasoning you employed: sunk cost fallacy. If you think your investment is going to lose value in the near future, you should sell it. What you paid for it is irrelevant.
Another possible explanation of stock market activity is that while everyone really should have known on Tuesday that Barack was probably going to win, and that he probably wasn’t going to instantly transform into Mr. Transformative all-around-great guy his supporters would like him to be, impact of a catastrophic event probably happening is not the same as the impact of it definitely happening. Maybe stocks were already depressed enough to reflect that Obama was probably going to win, but retained some residual value reflecting the possibility that they would shoot up in value if he didn’t. It’s the difference between a new lottery ticket (probably $0, but maybe a lot more) and a used one (definitely $0).
November 8th, 2008 at 2:26 pm
Politicians and political junkies are full of themselves, and therefore routinely overestimate the impact of their fortunes and daily chatter on markets.
Over time, the extent of political screwups definitely affect markets. The notion that a widely predicted election outcome would make a big impact on market prices on a particular day or week is ludicrous.
The Institute for Supply Management released their October survey this week, and it was a shocker, helping send the Dow down by 10% in two days. It showed much more weakness than expected. That and other economic news was the focus of investor attention, not a bunch of lame politicians playing with themselves and filling the air with another dose of their hot air.
November 10th, 2008 at 1:53 pm
To clarify what I wrote above, it’s not that it’s never a good idea to “cut your losses.” It’s just that the only time it makes sense to cut your losses is when you either think that the stocks you’re currently invested in will never recover, or that other sectors of the market will recover more quickly. Neither of those appears to be the case in selloffs like what we’ve seen in the past several weeks (even before the election).
Otherwise, I agree with Ridge Runner.
November 11th, 2008 at 1:21 pm
“… the only time it makes sense to cut your losses is when you either think that the stocks you’re currently invested in will never recover,…”
That may well be the case today. As our gracious host pointed out, there’s a lot of room below 8900. Very possibly, more room.
Take a look at Starbucks: Their profit fell 95%. (How can they lose money selling $4 cups of coffee?) Their stock has gone from a high of about $37 in 2007, to today’s $10. If anybody thinks it’ll get back to $30, this is certainly a terrific time to buy.
Any takers?
How about General Motors? A fairly high-cap stock. $42 about this time last year, $2.90 today. Another terrific buy.
Go back to 1929. How long did it take the Dow to get back to its high? Not till November 1954. Almost 25 years.
So now really is a good time to buy. That’s how Templeton got his start. He bought in 1929 – 1930.
He was patient. And he had a lifetime ahead of him.