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.
Indeed, you can read too much into the leaps and falls of any individual stock price swing. When reading Grande Expectations, a book that tracked the performance of Starbucks stock over the course of a year, I was surprised to hear about how much Starbucks stock would drop when the company delivered a dividend larger than the previous quarter’s, but lower than analysts’ expectations. It’s the same company, serving up even more lattes than it was three months ago, but the stock would drop because those who watch the industry thought it would perform even better than it did.
And indeed, the stock market is responding to all kinds of incoming data — whether demand in foreign markets is expanding or contracting, the price of oil, interest rates, developments in technology, instability in foreign countries, consumer confidence and changing tastes, companies’ announced plans to deal with all of these changing factors, change in companies’ leadership, even the weather.
But there are a couple of broad conclusions we can draw. First, it’s not just one company or one industry that is dropping quickly; it’s very broad and very steep. Everybody thinks that the economy is in a bad spot, and that a turnaround isn’t coming overnight. Obama’s plan to improve things has been signed into law; its passage looked near-certain for weeks, and he’s been the expected president since Election Day. (A reader suggested that once he took the lead in mid-September, the markets started reacting to Obama as the expected president-in-waiting. I’m not sure I agree with that theory, but I’ll throw it out there anyway.)
And as noted Friday, the markets have been heading down, pretty sharply. Since Obama’s election, there’s been quite a bit of ominous news for the markets coming from the administration — probably not sufficient to drive down stock prices by themselves, but clearly incapable to mitigate other bad economic factors. We’ve seen anxiety about the lack of detail in Geithner’s plan, massive government borrowing squeezing out capital that would otherwise be available to the private sector, a dread of future tax hikes, and an overall sense that those running Washington see corporate America as a scapegoat/villain/punching bag, not a partner in building prosperity. Oh, and in order to build support for his plan, the president is declaring the economy is on the verge of “catastrophe.”
However, for whatever mistakes the administration has made, Congress may be even more responsible for the markets’ anxiety. We’ve had House Financial Services Committee chair Barney Frank talking about a maximum wage even for companies that don’t take bailout funds, Senate Banking Committee chair Chris Dodd talking about nationalizing the banks, and Rep. Maxine Waters posing questions that are indecipherable to the bank CEOs before the House committee, asking if they’ve reduced the amount of credit available to card holders if they shop at particular stores.
Anybody wanting to invest in a company wants to see a stable business environment condusive to making profits, both short and long-term. When Washington can change any rule at any time, where’s the stability?
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