The Stock Market Votes?

March 5, 2009

by Mario Rizzo

 

If Brad DeLong is right that the data suggesting where we are now and are likely to be in the near future was available before 2009, then what accounts for the stock market continuing to fall?  The Dow has fallen 2800 or more (it changes every minute) since Obama was elected.  

 

Is the WSJ correct that this is a sign that the stimulus and various bailouts thus far (meaning the policies and the uncertainty generated by them) have been counterproductive?

 

 

 

 

4 Responses to “The Stock Market Votes?”


  1. No, the data is correlated not causal.

    The bottoming out of the stock market can also be seen as a growing number of people who are cashing out of the market to fend for themselves for the next few years (just like the banks are hoarding cash).

    Perhaps the first dip in the market was finicky traders who didn’t want to downgrade to a mercedes. The current decline may be more and more individuals and institutional investors pulling their money out slowly as they realize that their nest-egg won’t bounce, so they are simply trying to cut their losses.

    Initial dip: jelly
    Protracted dip: bread

    Though Obama can pass or veto legislation, the presidential impact on the economy dwindles when the wound is systemic. I would venture that if there’s any causal relation between presidential support and economic health is that the latter pushes the former (up or down). As Obama took office on the largest financial disaster in 80 years, the public is realizing that it isn’t his fault, and he’s only one man/cabinet and can’t stop the avalanche.

    The stock market is an indicator of the expected financial health of the companies owned, not an indicator of whether gov’t bailouts will work. The trader’s influence in pushing the market index up or down based on new news (interest rates, manufacturing numbers) is long since gone. The only people in the market are either stuck in it (like owning more than your house is worth), or padded enough to not care.

    The WSJ just wants to undermine people’s opinions and conceptions of Obama, not comment on the reality of the situation.

  2. B S Says:

    I would expect that most agree with Bryon in that the stock market is an indicator of the expected future value of corporate America and that a President (no matter the Bush Man or OB Mama) or one man is not responsible for its value. However I do believe that the government (President together with the Congress) with its large spending budget, presidential cabinets (Secretary of Treasury, US Fed Chairman, etc.) and congressional committees (Ways and Means, Banking, Housing, etc) do contribute to corporate American and in doing so has market value influence. The US government only has the ability to steer its ever smaller ship with interest rates and fiscal policy in the more complicated oceans of this world. It never had the ability (although many differed) to control the winds of the world’s employment and wage problems or the high and turbulent swells of the various economic seas of oil demand and raw material prices. So although I agree with Bryon that Obama’s election is not to blame for the reason of the fall in the stock market I do agree with the WSJ that governmental policies and uncertainties have contributed to its steep decline and possibly to its depth.

    The largest blame however I place on the American people, myself included, for hiring and voting corrupt and ignorant politicians to run our government. I am disappointed that we allowed these buffoons to assist their high paid financial and corporate friends to risk and loose their shareholders and bondholders’ money (and our 401Ks) and put the American people at risk. I am more upset that we the US citizens and taxpayers, our children and our grandchildren will also be required to pay for their antics for years to come.

    The economic numbers supported that the higher values of stocks (Oct 2007) homes (2006), and materials were overpriced and that a correction was inevitable as Brad DeLong professed. The fast 5% to 10% daily rise in one stock, the 20% to 30% annual gains in housing and raw materials doubling on an annual basis, became common place. The herd of bulls became larger and drove further up the mountain with total disregard for the known fact that the higher you climb the further and faster you fall. History repeatedly shown that this is never sustainable but the herd kept charging up the hill, finding pleasure in that additional dollar, wanting, hoping and eventually believing it would continue.

    The current market continues to fall as the future expectation for the value corporate America falls. The market was excessively overvalued as Brad DeLong professed so it corrected. It was overvalued because people were consuming goods and products with borrowings from increasingly inflated real estate values and seemly unlimited credit cards and not with earnings. When the real estate market became saturated, construction stopped, construction workers laid off (first group of unemployed), home prices dropped, unemployment increased, loans defaulted, consumer good and products manufacturers sales decline, consumer and retail workers laid off (second tier of unemployed), credit card defaults, service and support sales decline, service workers laid off (third tier). This unwinding is not uniformed. To exacerbate the problem many of the employed took lower paying jobs, so not only are there less people working, the people that are working are making less. Jobs and earnings is the most important factor in any economy and Bush or Obama trying to tell the American the economy is strong to keep up consumer confidence is worthless. The future expectation of the market is built on jobs and earnings, not a cheerleader that speaks well or in Bush’s case in one that doesn’t.

    True value or wealth is derived from increased earnings from the production of capital goods. From the late 1970s to the 1990 the US derived their wealth from producing capital goods from cheap foreign resources, followed by investing capital in other countries, marketing technologies, and managing inflationary values to its advantage. It was during that period America was changing from a nation of manufacturing to a nation of consumers. The 1990 to 1999 PC period which included the world wide PC expansion followed by the dot.com era, which may have been biggest US economic explosion in its history. The US actually started to manufacturer again. We could not be happy with our success and reasonable profits, so we once again needed to get that extra dollar and had to outsource the PC and later its software. The PC and the dot.com era came to an end, the US economy peaked and started its economic decline in true wealth. From 1999 to 2002 we were in serious economic problems. Then at the end of 2002 to 2006 came the glorious housing market, home construction as far as you could see in every direction, a period in which home values doubled and home construction industry prompted the whole US economy. Unfortunately this was a house of cards built on inflationary values as a result of irresponsible governmental fiscal policy which was supported by the Fed Chairman’s interest policy and where the Congress and the Secretary of Treasury supported unregulated banking and corporate oversight.

    The above rendition supports the fall of the market to where it is today. The continual fall however is a result of the future expectation or fear that Corporate America will be unable to satisfy their loan covenants and loans will be called. A company can have value with its assets exceeding its liabilities. A company can have a great future with higher projected sales and a low PE. A company can be profitable earning a decent return on its equity or its assets. Many companies in corporate America with their lower stock prices have many of these positive attributes and most definitely would be considered undervalued as many were in 1929. However as history has shown if profitable corporations cannot retain its credit placements, and loans are called they are no longer a going concern, i.e. World Com MCI. Banks along with shareholders of Corporate America will continue to fear their ability to cover future expectations and stock prices will continue to be under pressure.

    The good news is there is always a bottom….Since Jobs and Earnings are the ultimate driver of this Magical Mystery Tour bus, Stock Prices will level off after the Great Depression of 2012, this is when the future expectation of unemployment will reach its peak, and wages will reach their lowest levels and the liquidation value of Corporate America will be equal to the Market Cap.

    Hats off to the shareholders of corporations with loaded with cash, assets, sales and no debt.

  3. Bill Stepp Says:

    The market’s drop is just reflecting lowered expectations of corporate earnings and cash flows. Its continuing high volatility reflects continued uncertainty about the duration and effects of government intervention.

    I’ll bet the fattest economist alive has eaten lots of that mix going into the oven he mentioned.

  4. Chris Says:

    The stock market is being proped up with trillions of American Taxpayer dollars.

    Why?

    2 reasons-
    1. the higher the stock prices are the more taxes the government gets as either you bought really low and have made a profit or you bought high and haven’t lost as much worth as you had at the bottom. SO, IT IS ABOUT TAX REVENUE>

    2. It makes the market appear to have confidence from investors and people, they see the markets move up and decide to get in or go buy stuff thinking the economic outlook is getting better. I feel like there were people getting back in the market but as of this date (july 4th), I’m wondering how long before people start bailing agian when they see a couple of 200 point losses in a few day span. it seems most companies profits are still losing and they’re outlooks don’t appear to be to rosey either. And most companies have refinanced alot of debt that is slowley coming due in the near future. Plus, many companies have solf off parts of the operations so there is no way they are going to get back to the same profit margins they were at before the crisis. And many have issued new shares which dilute the worth of the overall shares. The only way most of the companies can make a quick recovery is to sell less for more in which we are begining to see in the stores, smaller package at the same or higher price.

    Now, take a look at the stock prices, before this melt down I had never seen a stock price go up when a company offered millions of more shares at 15% the current price and the stock price go up, and on top that the company is losing money. How does that happen? I couldn’t see a real long term investor buying in at this point. Which leads me to believe there is government or some big market players manipulation going on here, just doesn’t make sense to me at all. Beware fo the market right now, I think we’re going to have another dive soon!

    Unless the cheapest way the government can keep the market up artificially high for a short time being is to stop short selling or limit the decline to a certian % per day and then cut off trading. But to me this entire government intevention has wreaked havoc on the stock market, and that is why I don’t see people going long. Of course you have peolpe in 401K’s that really don’t follow or keep up with they’re retirement AT ALL, they’re all in. What a crazy way to plan for retirement.

    happy 4th to all – Call Govco and get rid of The Cap & Trader Bill, We must defeat this!


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