Now even though, as Ben Walsh contends, market moves are often just noise, a downshift of over 2% in the S&P on the day after a Presidential election is being ascribed meaning by market touts, and therefore, by golly, it does mean something. But there is an amusing gap between the breathless headlines about market/CEO unhappiness with the Obama win, and fears of No
Grand Bargain Great Betrayal, versus the responses of old market hands.
A lot of the reaction looks like “buy on rumor, sell on news.” The stock market has looked toppy for a while; it wouldn’t have been surprising if it had fallen on a Romney win too. Jesse points out:
I said some time ago that if Obama was re-elected the equity markets would sell off.
That was almost a no brainer, if one looks at the historical market action after a win by an incumbent. But more importantly, the implications for tax selling this year with the reasonable expectations of higher taxes next year.
Bloomberg also picks up the notion that some of the selling is Obama-related tax avoidance.
Oh, but notice we’ve gotten this far….and you usually have to get at least this far into market-relatated commentary before you find out (if you find out) that stock futures rose overnight when the Obama win was official, and fell in the European AM on bad news out of Greece?
But if you read the Usual Suspects, the market indigestion is being used most often to scream for the necessity of a
Grand Bargain Great Betrayal. Now in fact, it was pretty much a given that we’d have a big budget pigfight over the fiscal cliff. So what exactly changed as of today? It appears just that we were past the distractions of Sandy and the election, but I thought market professionals were supposed to be capable of looking beyond the end of their nose.
And in case anyone missed getting the memo, Obama was planning on delivering his Great Betrayal in the lame duck session. Now, amusingly, Romney was probably willing to let a more sizable fiscal deficit continue than Obama is (the Republicans are keener about preserving their tax bennies and gutting Social Security). So from that vantage point, the market reaction is correct, but for reasons at odds with the prevailing narrative: Obama is more committed to cutting the deficit than Romney was, which will deliver less of a hit to growth, which is better for stocks. Remember, Obama kept pointing out how Romney’s deficit cutting plans didn’t begin to add up, and that was likely not due to non-disclosure of “tah dah” items, it was probably the plan.
The headlines are broadcasting Wall Street’s wish list even more loudly than usual. Some examples:
Europe’s Woes and Worries Over U.S. Plans Rattle Markets New York Times
Wall Street Slams On Brakes as Hazards Loom Wall Street Journal
The Financial Times points out that the Obama victory (and gain in Senate seats) has not changed the Congressional dynamic: Few signs of fiscal cliff concessions
This is all tame compared to the reactions of deficit hysterics, such as: MARC FABER: Obama Is A Disaster, The Stock Market Should Have Fallen 50%, And You Should Buy Yourself A Machine Gun Clusterstock
And the overnight reports keep up the drumbeat:
It’s telling that the most sensible comment comes not out of the US or the UK, but Australia. While their discussion of Obama isn’t quite right (the man gets a simply remarkable amount of positive and negative reactions), this section from a MacroBusiness post by Flashman is spot on about the markets’ dangerous obsessions:
As an equities analyst, I was taught to look at the cash flows and balance sheet of a company as well as its profit and loss statement. What I learnt also was that the companies that delivered the greatest amount of profit growth also had some of the worst balance sheets and some of the most unsustainable cash flow.
The world, if it were a company, would be Enron. Its various divisions have, in the past 100 years or so, delivered blistering rates of growth, but its business model is structurally unsound and there is a massive disconnect between the gains of its executives and the returns enjoyed by all shareholders. Its administration is opaque, its financial measurement is flawed, its environmental record is awful and many of its managers are corrupt, incompetent or both. Some don’t even show up for work. Most of all, however, the world is largely borrowing from its future to deliver returns to the present. And while there’s no small amount of true innovation and genius in the mix, most of this entity’s economic performance, its profit line if you will, has been at the expense of its balance sheet: the earth.
America is the biggest operating unit of this planet-company and its re-elected boss is not a bad guy; some would even say he’s the best we have. But rather than demand ever-increasing dividends from a clapped-out machine, the world’s investors – all of us – should be looking at the balance sheet and start thinking about the structural issues that warrant major repair work.
Our obsession with bottom-line growth – gross domestic product – is ultimately going to harm our investment, just as it did to share market investors leading up to the financial crisis. Our inability to comprehend that growth is a careful balance of land, labour, capital and innovation – not a right that can be delivered sustainably through expedient means – will eventually leave us unstuck. The market’s refusal to comprehend politics beyond the trading day is evidence of a system that’s deeply flawed.