Obama and the stock market. Worst week ever?

As a student of the market and a participant I want to share my opinions on the market’s action during the week of the election.

As you know the market had two days of very steep losses after Obama won the election.

Before we come to a conclusion it is important to realize how to understand and read the market. There is no exact science or explanation to the action of any particular day. You will hear often the news agencies offer explanations every day, but I assure you that 99% of the time these explanations are just fluff.

Some very common ones are:
- profit taking
- investors worried about recession
- investors cheering company x or upset about company z
- and other absolutely trivial events.

The truth is that the news you hear may contribute to a particular move, but the market as an entity has already made up its mind. For example in a bull market, no amount of bad news can stop the surge upwards and vice versa. Which by the way, is a great indicator that the market is very strong – when it reacts to news in ways that do not make sense.

The market is also a predictor of sorts. In a sense that investors/traders use the market for future purposes. How else can you make money, right? If I told you that company A will make a profit OR that company A made a profit – which piece of information would you prefer? Obviously the former, however that information is often hard to come by. Companies give guidance and predictions on how they will do – but that is not how you make money.

On a more general scale, the market is generally a very good predictor of the economy. Remember, the stock market will turn before the economy does. In early 2000, market began to tank and we entered a recession about 6 months after that. In 1992 the market embarked upon the greatest bull market we have ever experienced and the economy boomed vice versa.

It may appear that the economy came first, but I assure you that is not the case. Eventually they begin to feed off each other, but only one goes first.

Another important note is that the stock market does not like surprises or uncertainty, this should make sense, if you were to accept the market as a predictive beast then anything it cannot predict will be treated negatively. For example the morning of 9/11 the market opened sharply lower, because it was out of the ordinary. Similarly the election week of George W. Bush was a tough week because of the complications with Florida.

So! Because the market is a predictor and it’s action is hard to explain what happened this week?

First of all, we had the worst week of any election, ever:

Year Dow S&P Nasdaq President elect
2008 -7.08 -7.43 -7.46 Barack Obama
2004 +3.51 +3.15 +2.73 George W. Bush
2000 -3.19 -4.60 -11.32 No decision: G.W. Bush v Al Gore*
1996 +2.28 +2.34 +2.31 William Clinton
1992 -0.38 -0.56 +2.02 William Clinton
1988 -2.84 -2.63 -1.34 George H. W. Bush
1984 -2.02 -1.65 -0.42 Ronald Reagan
1980 -0.51 +0.11 +0.19 Ronald Reagan
1976 -2.38 -2.21 -1.02 James Carter
1972 +1.06 -0.22 -0.34 Richard Nixon
1968 +1.35 +0.82 — Richard Nixon
1964 +0.16 +0.06 — Lyndon Johnson
1960 +1.84 +1.38 — John Kennedy
1956 -2.02 -2.65 — Dwight Eisenhower
1952 +1.20 +0.73 — Dwight Eisenhower
1948 -6.00 -7.16 — Harry Truman
1944 +0.11 +0.31 — Franklin Roosevelt
1940 +1.06 +0.81 — Franklin Roosevelt
1936 +2.79 +1.40 — Franklin Roosevelt
1932 +5.34 +8.02 — Franklin Roosevelt
1928 +2.13 +1.99 — Herbert Hoover
1924 +0.93 — — Calvin Coolidge
1920 -2.34 — — Warren Harding
1916 +0.41 — — Woodrow Wilson
1912 +1.13 — — Woodrow Wilson
1908 +5.28 — — William Taft
1904 +2.75 — — Theodore Roosevelt
1900 +7.03 — — William McKinley
Source: http://uk.reuters.com/article/usMktRpt/idUKN0748885920081107

The only week that comes close is the week when Truman defeated Dewey. That makes perfect sense considering that was a massive shock and NO ONE expected Truman to win.

However there were no surprises here and in fact most pundits expected a strong rally considering everything went according to ‘plan’.

The explanation is relatively simple; The market is predicting and/or in Wall St. jargon ‘pricing in’ the Obama effect. Reason being is that Obama’s policies are not economy friendly, they focus too much on wealth distribution and are anti-corporation. Therefore the market is selling off in anticipation. Obama’s stimulus packages and tax cuts to those making under 40,000k sound benevolent and philanthropic, but they will do nothing for job creation. We are also in a bear market now and so the general direction is down.
This certainly explains why most investors did not vote for Obama (according to a few IBD polls I saw). His major constituency were either the youth who do not have a 401k or low income voters who cannot or do not want to save/invest.

So while some of us suffer watching our retirement accounts shrivel the rest of America celebrates a historic occasion.

In a previous post I talked about our 401k being in danger and the irony is that a lot of the sell-off has to do with Obama himself. Quite a few proficient traders spoke about the market selling off weeks before the election out of fear that Obama might win.

Note: I am still 100% long on my 401k and continuing to contribute..
Note: I have no short term positions.