Wednesday, March 4, 2009

Sun Rises, Market Falls

another interesting, well-written analysis from last week's (visit their site via left sidebar), on Obama, the markets, politics of, et. al. indeed, everything from 538 is interesting and insightful. sj

Sun Rises, Market Falls

One of the more unapologetically idiotic notions being advanced by
certain conservative commentators is the idea that the poor
performance of the stock markets represents a negative reaction to
Barack Obama's stimulus package.

For one thing, the trading markets aren't gauges of overall economic
health. They are gauges of future anticipated profits for the large
corporations that make up their components. In the long run,
certainly, these two things should be correlated. But they needn't be
perfectly so: an oil price shock, for instance, is possibly good for
the profitability of Exxon, while being damaging to the economy at
large. Likewise, the announcement of a plan to take over and
turnaround Citigroup, perhaps a necessary evil for economic recovery,
would certainly not be good for Citigroup's shareholders, who would
probably get wiped out in the process.

That's not the the basis of my critique, however. Rather, it's that
this line of argumentation often cites "evidence" that flies in the
face of Finance 101.

Robust markets like major stock indices are fairly good at
incorporating information. They don't literally have to see an event
occur in order to "price in" its effects. On Wednesday, for example,
Barack Obama signed the stimulus package into law. Once this
occurred, the prospects for the passage of the stimulus rose to 100%.
But what had been the probability of the stimulus bill passing the
very second before Obama put pen to paper? Probably about 99.999999%,
accounting for the small probability of a hostile takeover by space
aliens in the intervening moments. The performance of the market in
reaction to such events tells us no more about how it feels about
them than it does to the rising of the sun.

To the extent that we can learn anything about the market's
preference for the stimulus, we'd instead need to look at those
moments where the passage of a stimulus package became more or less
certain, or its magnitude became significantly larger or smaller than
previously anticipated. In the article I linked to above, professors
Bittlingmayer and Hazlett claim to have isolated a couple of such

More pointedly, key political victories for the Team Obama spending
plan have not been viewed as buying opportunities on Wall Street. A
string of negative market reactions began with the December 18
announcement of a stimulus bill of $700 billion (Dow down 2.5%),
continued with the January 7 announcement that the actual plan would
be “on the high side” (-2.7%) and continued with last week’s 61-36
Senate vote supporting the Administration’s fiscal plan. The White
House victory and the new bank bail-out plan announced the following
day by Treasury Secretary Geithner were met with a 5% wipe-out in the
DJI, and a decline in Treasury bond yields, indicating a “flight to

Bittlingmayer and Hazlett's memories turn out to be rather selective.
Take the December 18th date they describe in their article, when the
markets fell by 2.5 percent. On this date, according to the Wall
Street Journal Obama had outlined the broad parameters of stimulus
package "worth between $675 billion to $775 billion" to Capitol Hill.
Was this a surprise to the markets? Not according to contemporaneous
accounts of the market's activity that day, which do not so much as
mention the stimulus. Moreover, at this time, there were as many
complaints that the stimulus was too small as that it was too large.
As the Journal then reported:

"The biggest fear is that people will do too little," said one
Democratic leadership aide, "like a start-up that fails because it
didn't do enough."

Obama aides hope to keep the package below the trillion-dollar mark,
a psychological threshold that could carry political consequences, as
they fear being accused of adding too much to the country's long-term
budget deficit.

One could advance an argument, which would be no less unconvincing
than Bittlingmayer and Hazlett's, that the market was behaving badly
that day because it wanted more stimulus rather than less.

How about January 7th, the next occasion cited by Bittlingmayer and
Hazlett? Bittlingmayer and Hazlett's phrasing to the contrary, there
was no major "announcement" about the stimulus bill that day.
Instead, there were some off-handed remarks made by Obama at a
morning briefing on the economy, which were described by MarketWatch
as such:

President-elect Barack Obama said Wednesday that his proposals to
jump-start the economy must also build a stronger nation in the long
run. Obama said the size of the stimulus package hasn't yet been
settled in discussions with lawmakers, but it would likely be on the
"high side" of his team's estimates and lower than some economists
have been recommending. The latest guesses are that it will be about
$775 billion over two years.

That sort of carefully-parsed response is hardly the sort of "shock"
that is likely to have altered Wall Street's expectations about the
stimulus. Indeed, Wall Street had many better things to be worried
about that day between a plethora of dour economic news.

And how about November 24th, when Obama rolled out his economic
advisory team and prompted the Wall Street Journal headline "Obama
Signals Big Stimulus Plan"? Bittlingmayer and Hazlett forget to
mention this date. And little wonder why: the Dow had closed up by
almost 400 points.

The fact is, there have been very few surprises in the entire debate
over the stimulus package, the passage of which was more or less
inevitable from the moment Obama took office, and the eventual size
of which -- just under $800 billion -- was in line with the
expectations that the markets had held for weeks and weeks. The
nearest exception was probably on January 29th, when the initial
version of the stimulus passed through the House without a single
Republican vote, something which looked as thought it might
theoretically imperil the prospects of the bill passing in the
Senate. If the market was anti-stimulus, it should have loved this
news; instead it dumped about 230 points.

Disclosure of conflict of interest: I own some mutual funds. I'd like
to see 'em go up. I'm not an anti-Wall Street guy. I'm just anti-stupid.

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