Mr. Sensitive

November 16, 2012

Did Obama Tank The Market?

Filed under: Uncategorized — lbej @ 08:18

In a word: kinda.

In the seven trading sessions since the President won reelection last Tuesday, the Dow Industrials have lost more than 700 points.  The Republicans argued for months that Romney would be better for the market—could they have been right?

Once again: kinda.

Let me explain.

I can think of four good reasons why the market is tanking:

Reason #1 – The market likes to prove the experts wrong.  The conventional wisdom heading into the summer was that sellers would have the upper hand as political uncertainty increased and seasonal factors weighed.  ‘Sell in May and go away?’  Not this year.  From the first week of June to the first week of October the Dow added 13%.  Another widely held view was that political uncertainty was the biggest hindrance to the market and the economy, and that we could expect a rally once we had a winner, no matter which party it was.  Again, the markets did the opposite of what was expected, falling off a cliff once the magnitude of the Democratic victory became clear.  The market defied expectations in both cases, in no small part simply because that’s what the market does.

Reason #2 – The summer rally went too far.  That 13% rally coincided with decelerating corporate earnings, increasing political and economic uncertainty in Europe, Japan and China, and, of course, the approach of the fiscal cliff.  The market can look past current economic challenges to a certain extent, but after big gains on the back of dubious fundamentals, investors decided—wisely—that it was time to book profits.

Reason #3 – Taxes are going up.  The President says he won’t back down, and with his last election over, he doesn’t have much reason to.  If you have profits to book, you want to minimize the taxes you have to pay on your capital gains.  Plenty of investors are doing just that.  Furthermore, with future tax rates on dividend income in doubt, there’s even more reason to dump the high-yielding telecom, utility, and energy stocks that have performed so well this year.

Reason #4 – A lot of companies and industry groups bet big on Romney, and they crapped out.  For the executives of the Wall Street banks and energy companies in particular, the hoped-for return to the lawless Bush years will have to wait until 2017, at least.  Four years is a long time, and sociopaths aren’t known for their patience.  There’s more than a few shysters who will have to look someplace other than the stock market for the next big con.

That’s four reasons.  The first two are nothing other than the market doing what it does; the last two are direct consequences of the election.  I want higher taxes and tougher regulation, and if we need to correct ten percent or more while the market purges itself of those folks who can’t abide either, that’s fine by me.  The short-term pain will position the market and the broader economy for more durable gains not based on risky gambles and tax avoidance.  So the bottom line is that, yeah, Obama did kinda tank the market; and twelve to eighteen months from now, we may be glad he did.

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