Obama and Markets

“The stock market has forecast nine of the last five recessions.” –Paul Samuelson

For anyone that’s been living under a rock, Obama passed a big huge giant stimulus package that’s going to fix everything and pay everyone’s mortgage. And then the stock market tanked. Well, continued to tank.

A great number of conservatives are arguing that the stock market is an indication that “markets” are rejecting the Obama plan.

From this article on Real Clear Markets:

“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 quality.”

That article was written by a professor of finance at the University of Kansas and a professor of law and economics at George Mason University.

My BFF Nate Silver addresses some of the issues raised in this article. This is, I think, his best point in arguing with those who insist that Obama has RUINED THE STOCK MARKET:

“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.”

He goes on to pick apart the rest of that article.

The Real Clear Markets article seems to want to have it both ways. They argue that the stock market is a forecasting agent, and yet assume the market refuses to react to forecasted data until the minute it becomes fact.

The stock traders do not work like this. If they did, you and me and Joe the Plumber could be making tons of money on the stock market. Traders of stocks attempt to forecast what is going to happen in the future and would have accommodated the stimulus news long before the bill was signed, since, as Silver says, it was very likely to pass.

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