Earn What You Spend

A popular meme currently going around is that the markets are not too fond of the President-elect given their performance this week.   See here,here, here and here for more background.  The S&P500 is down 3.9% for the week - certainly not numbers I like to see in any given week. 

UK Reuters jumps on the bandwagon: 

Whatever the reason, since Election Day, major U.S. indexes are down more than 7 percent. For the Dow Jones industrial average .DJI and Standard & Poor’s 500 .SPX, that represents the worst ever conclusion to the week of a presidential election. 

My first thought is to immediately dismiss this as incorrect - has anyone else been reading the economic news coming out?  Just yesterday we saw staggering unemployment numbers.  GM and Ford both posted staggering losses, and look to be on the brink of absolute bankruptcy.  According to the WSJ, they lost a combined $14.6 billion in cash, and, “in a reflection of how dire the situation is, GM acknowledged its cash reserves could approach the minimum levels it needs to keep its operations going later this year.”  

We see the highest unemployment since 1994 and two institutions of the United States economy move closer to bankruptcy, and the market only depreciates 3.9%?  That actually seems pretty good to me. 

Regardless, Wednesday wasn’t the market’s best day, so let’s take a historical look at what has happened the day after a presidential election:

Source: Reuters

Barack takes the lead here in a one-day market drops, even beating out FDR in 1932.  That’s pretty significant.  But what does this really mean?

According to one article about Wednesday’s drop: 

Stocks tumbled anew Wednesday amid worries about a global recession and more gloomy economic data on employment and the service sector.

Selling picked up the pace toward the end of the day, with declining issues outnumbering advancers by about 4-to-1 on the New York Stock Exchange. Volume was relatively light, which may have overstated investor negativity.

“Everybody woke up this morning and, probably after a short night’s sleep, started looking at the economic data and discovered the world hasn’t changed that much after all.”

So there are a few points worth noting here: 

• There was the anticipation of Friday’s unemployment data about to be released
• Volume was light, so a smaller number of trades creates a larger appearance of overall negativity
• The fundamentals of the economy had not changed overnight: it is still a long road ahead

The NYTimes elaborates:

There were no clear catalysts that spurred the sell-off — which dragged the Dow lower on Thursday by 443.48 points — beyond the regular drumbeat of poor earnings from the corporate sector and bleak data on the economy. Those reports have been arriving almost daily for the last few weeks, signs of a recession that many fear will be darker than anyone imagined just a year ago.

Does the market believe we’d be better served under a Republican administration?  This may be a common meme, but doesn’t square with reality, according to this Bloomberg article: 

“It’s ironic because most people think the market tends to do better under Republicans than Democrats, and the actual empirical evidence has been the opposite,” said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees $30 billion. “There’s conventional wisdom, and then there are the pure facts.”

Furthermore, Reuters also has an interesting point buried in their article: Tuesday was the biggest-ever election day rally with the Dow Rising 3.3%.

So was the market surprised by an Obama win?  Hardly. Unlike the pundits, the market has actually factored in an Obama win for quite a while:

Intrade betting about the election had the stock predicting a McCain victory open election day at an all-time low.  The market believed Obama was going to win well before it became official. 

Conclusion: 

Pundits have been concluding the drop in the market this week is attributable to Barack Obama winning the Presidency.  That is false.  Similarly, the drop in the stock market in the past few months cannot be pinned on the fact that markets don’t like George Bush: markets are smarter than this, they look at the fundamentals of the economy.  The key points here are: 

• The market actually factored in an Obama win before Wednesday (look at Intrade)
• The Tuesday saw the biggest-ever rally on an election day
• The economic news coming out this week has been particularly depressing

So what is my take?  Always beware of anyone trying to justify a political agenda by extrapolating information in the movement of the markets.  Such conclusions are misleading at best, and more often than not, factually incorrect.