Navigating OBAMArkets

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The stock market yesterday did not offer President-elect Barack Obama as warm a welcome as he would have liked. According to Bespoke, the Dow Jones Industrial Index’s decline of 5.1% was its worst post Presidential election day decline in history. As shown in the table below, yesterday was only the fourth time the Dow has ever lost more than 1% the day after a Presidential election (gray-shaded areas). “Coincidentally, all three previous periods occurred during the Great Depression as well as after an election that gave complete control to one political party,” said Bespoke.

The table also highlights how the Dow fared for the rest of the year. Unfortunately for the bulls, in each previous period the Dow had negative returns for an average loss of 2.1%.

bespoke-1.jpg

But it will be incorrect to necessarily ascribe the stock market’s decline to the election of Mr Obama, especially not knowing the detail of his agenda. In my opinion is was rather as a result of investors focusing anew on the dismal economic situation the new President will be inheriting. The message of recession-like conditions was yesterday confirmed by the worse-than-expected ISM Non-manufacturing Survey (down from 50.2 to 44.4).

Looking longer term, a BBC report refers to a 2006 study by Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, which shows that from 1948 to 2006 stock market returns averaged 15.3% a year under Democratic administrations, and just 9.5% a year under the Republicans. Also, a recent study published in the New York Times showed that $10,000 invested in the S&P 500 Index in 1929 would have grown to $11,733 if invested under Republican presidents, but to $300,671 under Democratic presidents.

The tag cloud – a way of visualizing word frequencies at a glance – of the text of Obama’s acceptance speech makes for interesting reading. Strikingly, the most widely-used word was “promise” (32 times)!

bespoke-2.jpg

While urgent challenges will face Mr Obama at the onset of his presidency, it remains difficult, in an environment of economic and profit recession, to read the stock market’s direction and make a call on whether a secular low has been reached. At least, frantic actions by central banks, governments and the IMF to fend off a total economic collapse, as well as gradually improving credit market conditions as seen from the TED spread declining by 211 basis points since the middle of October, are positive signs that we could be in a broad bottom area of this bear market. Shorter term, it is crucial for the recent lows (8,176 on the Dow Jones Industrial Index and 849 on the S&P 500 Index) to hold.

The last word goes to John Hussman (Hussman Funds) “It is impossible to be a successful equity investor without the willingness to accept some amount of market risk when conditions appear frightening. If anything should be clear from the bubbles of recent years, the greatest risks are not when prices are depressed, the economy is weak, and investors are frightened, but rather when prices are elevated and an unendingly positive outlook for technology, or housing, or global growth, or private equity, or emerging markets, or commodities seems all but certain.”

Related posts:
The challenges facing Obama
Sorry Obama, Wall Street doesn’t care

 

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3 comments to Navigating OBAMArkets

  • M.F. Almenara

    You write the following: “But it will be incorrect to necessarily ascribe the stock market’s decline to the election of Mr Obama, especially not knowing the detail of his agenda.”

    Surely, you must know Obama’s agenda and don’t need “details” to understand that it is destructive to investors. You, therefore, are contributing to blurring reality by not crediting Obama for the markets’ decline.

  • Martin Hutchinson analyses what a Democrat landslide means for stock market investing. He says nuclear and clean energy stocks, auto manufacturers, generic drug producers and muni bonds are a “buy”. But fossil fuel companies and financial institutions should be avoided.

    http://www.contrarianprofits.com/articles/6-investment-ideas-for-the-obamanomics-era/7951

  • Frank Wordick

    Your figures on market gains under Democratic administrations vs. those under Republican administrations are interesting, but bringing them to everyone’s attention is fairly useless. Wall Street “knows” that a Democratic administration means death for the market. They are not interested in facts. What they are interested in is self-serving propaganda, common knowledge and vulgar commonplaces. Wall Street like the Republican party knows that the Democrats will squanter big wads of money on Socialist programs like allowing poor people access to health care, which is obviously no good. Let’m croak! The money they firmly believe would be better spent on more handouts to Wall Street financial firm executives and directors who pissed billions of dollars of their stockholders money down the drainhole. This health care money is desperately needed for more golden handshakes, golden parachutes, stock option bailouts, several hundred million dollar salary packages, million dollar week-end company holidays in luxury resorts a la AIG, etc. As for squandering money, has any Republican bothered to take a gander at the current budget deficit? This current Republican administration is worse that even the Nixon one. At least Nixon didn’t contribute billions of taxpayers dollars to Wall Street fat asses and other Republicans and members of the New York Yacht Club. Also, despite bearing a stilted stance, Nixon did not walk into broomclosets and best of all he could talk. I can’t remember clearly, but I don’t believe Nixon had a policy of starting wars with every other country in the world either. We are very lucky to have gotten rid of Bush, before he could fully implement this latest attempt to start a war with Russia. We would have been in deep doo-doo, if he would have succeeded. Iraq is bad enough. Here we are paying egregious amounts of money in exchange for Dubya getting revenge on Saddam Hussein for putting a contact on his old man, George Snr. If I had to choose between a Socialist administration and a Republican one, gimme the Socialist. At least he’ll be sociable. But you’ll never get a Socialist in office, because the pollies will make sure that they are not allowed on the ballot. The last time a Socialist ran for president no state listed him on its ballot.

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