“They don’t ring a bell at the bottom” is an old saying which addresses the futility of calling a market bottom. This week’s rebound was a breath of fresh air in what had been a seemingly endless bear market swoon. It is really too early to know what precipitated this reversal. Was it simply a typical “dead cat bounce” for a terribly over-sold market? Were short-sellers, who had been winning virtually every bet for weeks on end, panicked into a “squeeze” situation by the unforeseen rally? Was Bernanke or Geithner’s testimony before Congress enough to reassure despondent markets? Was the rumored possible return of the up-tick rule enough to spark a rally?
It is really hard to know the proximate cause of this week’s bullishness. However, the rebound seems to coincide with a gradual but profound willingness on the part of the press—even reliable supporters of the President—to begin focusing their concern and even anger on the short-comings of the new administration. Is it possible that this week’s stock market rally was in part due to general relief on the part of investors that the Obama administration may not be either competent or deft enough to pass much of their agenda—particularly those parts considered radical and anti-business?
Face it, the past few weeks have not been great ones for the Obama administration. After getting off to a euphoric start, the wheels have come off the bus. There was the bank rescue plan debacle where the President set high expectations for Treasury Secretary Geithner’s presentation, which then turned out to be light on details. After the misstep, administration officials compounded their mistake by virtually disappearing—which created an information vacuum which fueled much of the stock market’s recent tailspin. The vetting process for administration officials has been heavily criticized as many nominees have had to withdraw from consideration either for tax lapses or other issues. The problem is especially acute at the one department critical to dealing with current economic problems—the Treasury. The administration was widely panned in Britain for snubbing visiting Prime Minister Gordon Brown. When pressed on the matter, officials indicated that the press of business on economic matters distracted the President’s team from their duties as good diplomatic hosts. Call it nit-picking or carping or predictable tripe from partisan hacks, however, one cannot help but notice that the President’s once-fawning press coverage has changed. Click on any of the following links: Fineman, Allen, Galston, Paglia, Murray, Samuelson.
Markets are discounting mechanisms which anticipate future values based on current information. While no one can legitimately claim that the financial crisis, deep recession or bear market we find ourselves in was President Obama’s fault, it is reasonable to point out the hastened swoon stocks have experienced since the election and especially since the new administration took office is attributable to concerns over the impact of administration-proposed policies. Further, the market’s depression only deepened as concerns grew that the new financial team was either insufficiently concerned about business or perhaps out of their depth.
Yet, as members of the President’s own party and those predisposed to support him in the media have begun to question some of his decisions or even his general fitness for the job, controversial proposals such as doing away with the secret ballot in unionization votes (“card check”), tax increases, health care reform, etc. appear less likely to be rammed through the Democrat-controlled Congress in their present form—if at all. And ironically, the market seems–at least thus far–to have altered its course in conjunction with these fading possibilities and the President’s fading aura.
And this is actually the way it should be in a democracy. Despite what some would have you believe, the stock market is not all about the wealthy. Either in 401(k)s, IRAs or regular brokerage accounts, middle class Americans have considerable exposure to the stock market and have been badly hurt by the protracted bear market. As a discounting mechanism, the market is offering a referendum of sorts on the current economic leadership of the nation and it has, until recently, found it lacking. It is possible that this week’s rally reflects a growing, collective belief that many of the most controversial items on the President’s recently-announced agenda will not come into law. Time will tell, but it certainly is a plausible explanation for a pleasantly bullish week.