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This is Obama's Economy   February 23rd, 2009
I think it's time to start holding Obama responsible       

 
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I pondered back in December when President Obama would be held responsible for the economy. Although I didn't discount the possibility that a post-election sell-off was at least partly due to the fear of higher taxes under Obama, I haven't been keen to blame Obama for any specific economic event. It just seemed premature. It no longer does.

Although Obama did inherit this situation, I'm convinced his words and actions are having an effect on the economy already. And, so far, not a positive one.

A brief review:
  • The market's September 2008 high point before it's definitive slide was 11,388 on September 19th. It then slid down through October 27th before rising to 9625 on election day (before the results were in). This represents a drop of 1763 points, or 15.5%, in the six weeks following the initial revelation of the extent of the crisis.

  • In the two days after Obama's electoral win, the market dropped to 8696, and by November 21st the market had dropped to 7552--a three week loss of 2073 points, or 21.5% (Point A on chart below is day after election day, point B is the low-point on November 21st before a brief recovery).

  • It seemed, at the time, that the market was taking the news of Obama's win worse than the financial crisis itself. In just three weeks it had dropped further than in the six weeks following the news of the financial crisis.

  • The market then stabilized at roughly 8500, more or less, through December and the first half of January.

  • On January 20th, 2009, Obama was sworn in as president. The DJIA dropped 332 points (4.0%) to 7949 (point D on chart below).

  • The market then stabilized at around 8100 for a few weeks, and then even rose a bit in expectation of Treasury Secretary Geithner's unveiling of the Obama financial sector rescue plan.

  • On February 10th, at 11am, Secretary Geithner unveiled his vague and undetailed plan. Within an hour the stock market dove 250 points (3.0%), and closed down 381 points (4.6%) as the market rejected the administration's non-plan (point E on chart below).

  • The markets then made some tepid gains until the day the president signed the stimulus package. On that day, February 17th, the markets dove 297 points (3.8%), point F on the chart below.

  • On the 18th Obama announced his homeowners bailout in Phoenix and the market shrugged it off with a meager gain of 3 points. Over the next two days, as the public was digesting the bailout plan and talk of bank nationalization increased, the market dropped 190 points (2.5%) to 7366 (between F and G in the chart below).

  • Last Friday the Obama administration felt it necessary to reassure the market that the president did not intend to nationalize banks . But the markets apparently didn't care too much given the fact that, over the weekend, some preliminary information on Obama's budget proposal started to be released... and it included, of all things, tax hikes during a recession.

  • On Monday, February 23rd, the market started to decline. By midday Obama's Press Secretary Robert Gibbs felt it necessary to re-state that the administration did not intend to nationalize banks . But apparently the market wasn't reassured... or, more likely, ignored it because that probably wasn't what was troubling them. Tax increases in what's been characterized as the worst economy since the Great Depression? Obeying nothing more than simple logic, the stock market dove 250 points (3.4%) to 7115 (point G on the chart below). This represents the lowest level since May 1997... almost 12 years ago.

  • The market then inched upwards on Tuesday, February 24th--perhaps in the hope of something positive from Obama's first State of the Union. However, Obama simply confirmed increased deficit spending, increased taxes, and increased costs due to a carbon-cap program. The market started sliding... and continue to slide for four trading days for a total loss of 588 points (7.99%)... so far. Point H on the chart below.
Since November 4th, the stock market has dropped from 9625 to 6763--a loss of 2862 points (30%). If you add up the losses itemized above that seem to eerily track major decisions of the Obama administration, the total is 4111.

What this means is that, potentially, Obama's decisions have caused 4111 points (42.7%) of damage to the market since the election. The fact that the net drop has "only" been 2862 points (30%) is because the market has been trying to squeeze out some gains in between major decisions by the administration. But, inevitably, the administration announces some other plan that spooks the market to give up its weak gains and head even further down.

Consider the following graph that represents the Dow Jones Index from election day until today:



What's rather remarkable is that every major drop in the market since election day has coincided with something the Obama administration has said or done--with one exception: Point C on December 1st. What did that coincide with? The day that it was declared that a recession had actually begun a year earlier.

Granted, we're in difficult times and there's bound to be bad news and general drops in the market. But aside from the general downward trend, every sharp drop in the market (other than point C) has coincided with a major economic policy announcement or action by the administration. Conversely, it doesn't appear that any major policy announcement or action has resulted in anything but a drop.

At this point (March 2nd) I count 80 trading days since the election, of which I count 32 days in which the stock market has gone up. That's a 60% chance of any given day being negative. Yet all seven major Obama-related events have led to losses (other than the homeowner bailout where it went up 3 points before diving the next day). Even if we give the latter event the benefit of the doubt, 6 out of 7 Obama economic events have been accompanied by not just minor declines in the market, but major declines. The chance of six out of seven events being on (or immediately followed by, for evening events) "down" days simply by dumb luck is only 4.7% (60% raised to the sixth power).

I think at this point it's clear that the market is making a very clear statement about President Obama's policies. The market dropped 15.5% in response to the financial crisis up until the election and has dropped 42.7% on days of major Obama policy announcements. In other words, there's a 95% chance that the market is treating Obama's policies as worse news than the initial financial crisis itself!

And, yes, this has an immediate impact on jobs. As small business owners see their investments decreasing in value and the stock market gives a "leading" indicator that the economy is still going down--and given Obama's insistence on talking down the economy--even though Obama's policies haven't really impacted the economy yet, his rhetoric has already had an effect. And a quick one.

Yes, Obama inherited a problem. And if he had had a calm, rational, inspiring, and confidence-building response to the problem and the market had still been trending downwards, a clear link couldn't be drawn. But it would seem that Obama's own actions since the election have driven the market down twice as much as the initial financial crisis did.

Considering there's no evidence that anything Bush did directly caused the current crisis, and considering the market is sending very clear signals about how it feels about Obama's policies, at this point I think it's fair to say that this is now Obama's economy.

And what does it have in common with Clinton's economy? They both had a Dow Jones index of about 7100.

Update 2/25/2009: The day after I wrote the above article, the following appeared in the NY Post:

Headline: "It's His Economy Now"

Obama still has a political cushion on the economy because he inherited such a mess - but, from now on, that cushion diminishes by the day. The ever-accelerating pace of the news cycle, plus Obama's overexposure and the size of the stimulus package (and the rapidity with which it passed) all mean he'll probably take ownership of the economy too quickly for comfort.


Update 2/25/2009: Two days after I wrote the article above, CNN had a similar sentiment:

It's true: He didn't break it. But now he owns it.

With President Obama's three major (and expensive) salvage plans in place, we can apply a version of the Pottery Barn rule that Colin Powell made famous in his warning about invading Iraq. Obama now has a controlling ownership stake in this economy and how it performs...

And while Obama is wildly popular with the public, the markets have held back on a standing ovation. The White House insists the president's down-talk on the economy while selling his rescue packages has been an "urgent and realistic" assessment, and is not a factor behind the stock market's slide. While it's true that continued bad economic news has hurt stock prices, it's hard not to notice that the Dow slipped 1,000 points during Obama's first 30 days in office -- and that stocks slid more than 4% in a single day when his Treasury Secretary unveiled a bank rescue plan.


Update 3/2/2009: Looking back at some humorous and instructive literature from the New York Times on election day 2008:

Wall Street built on recent gains Tuesday as reduced volatility and easing in the credit markets helped give stocks their strongest Election Day rally in 24 years...

Historically, Wall Street has enjoyed a bounce in the fourth quarter after a presidential election as investors breathe a sigh of relief that the long election cycle, with its accompanying uncertainty, has ended. Some analysts said investors seemed to be trying to get a jump on the expected rally by buying on Election Day.

'We don't know if it's the end of the bear market yet, but it looks as though the bear has taken a nap,' said Sam Stovall, chief investment strategist at Standard & Poor's equity research.


So, bucking the historical tendency, Wall Street didn't subsequently enjoy a bounce after this last election. And despite the very premature speculation that the "bear has taken a nap," the day after the election the market began it's plunge to shed another 30% of its value.

Update 3/2/2009: This article was originally posted on February 23rd, 2009, with the information available at that time. I updated it today to reflect the latest ongoing stock market dive that began the day following Obama's State of the Union and which seems to be further confirming the original analysis that when Obama speaks, the market drops.

Update 3/3/2009: About a week after I wrote the above article, the now-famous Wall Street Journal article made almost precisely the same point:

So what has happened in the last two months? ... What is new is the unveiling of Mr. Obama's agenda and his approach to governance... But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his "stimulus" spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest...

The market has notably plunged since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy. Health-care stocks have dived on fears of new government mandates and price controls. Private lenders to students have been told they're no longer wanted. Anyone who uses carbon energy has been warned to expect a huge tax increase from cap and trade. And every risk-taker and investor now knows that another tax increase will slam the economy in 2011, unless Mr. Obama lets Speaker Nancy Pelosi impose one even earlier.


Update 3/3/2009: The market extended its post-State of the Union drop to a fifth consecutive day, closing at 6726. This despite Obama's assurances today that it was a "good time to buy stock."

Update 3/5/2009: BusinessWeek reported today:

But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market...

A lack of details from Geithner disturbed investors, says Quincy Krosby, chief investment strategist at the Hartford. "Markets need certainty," she says. "The market has been sitting here waiting, waiting, waiting. That allows rumors and conspiracy theories to dominate..."

Investors aren't just expressing their political beliefs that taxes and regulations are bad for the economy. They're also making a practical calculation that they will hurt corporate bottom lines in the future. "What you're doing is lowering the profitability of these firms," says Bill Larkin of Cabot Money Management.


Update 3/6/2009: Bloomberg reports:

President Barack Obama now has the distinction of presiding over his own bear market.

The Dow Jones Industrial Average fell 20 percent since Inauguration Day, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg....

"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..."

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.


Update 3/6/2009: I ran across this article which illustrates why it's important that President Obama pay attention to the stock market.

One of them is the perception of the American consumer and investor. The stock market is the best gauge of investor sentiment. A look at the chart plainly reveals that investors don't believe the government's efforts will work. If the investor doesn't believe it, the consumer won't believe it. If the consumer doesn't believe, the consumer won't spend. If the consumer doesn't spend, ...(it's a domino effect as you've figured.)


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