Money Moves the Market
November 23, 2008
On October 23, 2008 in "Bear Market Obama" we accurately predicted that the stock market would drop if Barack Obama were to be elected President of the United States and if the Democrats were to win commanding majorities in the Congress.
The Dow Jones Industrial Average closed at 9625.28 on November 4th, Election Day, before the results of the election were known.
By November 21st, in the wake of the Obama and Democrat Party victories, the Dow had dropped to an intraday low of 7,449.38, down a stunning 2,175.90 points, or about 23% in less than three weeks.
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There is an old and reliable axiom that 'money moves the market'. It's shorthand for the concept that bountiful amounts of capital flowing through the economic system lead to bull markets. Capital shortages lead to bear markets.
The Treasury and the Fed have pumped hundreds of billions of dollars into the system over the past few months. Formerly, those actions would have led at least to market stabilization, if not rallies. This time, however, the markets virtually collapsed after Obama's election.
Investors don't know what to expect of him, since he has no record.
His speeches and his votes on economic policy have indicated a proclivity for higher taxes, redistribution of wealth, energy policies designed to limit supplies and raise prices, and government control of the health care industry.
Those are not the types of policies that inspire investors to take risk.
On Friday, November 21st, however, Obama's public relations firm, NBC News, made it known that the president-elect intends to nominate Tim Geithner as Treasury Secretary. Geithner is the current president of the Federal Reserve Bank of New York and is considered to be a capitalist.
While the argument could be made that at the New York Fed Geithner should have known long ago about the peril into which the money center banks were headed as a result of their subprime lending, the stock market rallied nearly 500 points after the NBC announcement.
Better the capitalist you know than the socialist you don't.
On Saturday, the Obama camp signaled that they might not raise taxes on upper income individuals, and may instead allow the Bush tax cuts to expire as scheduled in 2010.
They and Speaker of the House Nancy Pelosi also indicated that they'd like a stimulus package of public works programs in the amount of $500 billion to $800 billion.
The Democrats already have their eyes on the next election, which is just 23 short months away. They don't want to face an electorate suffering from 10% unemployment, which likely would happen if they were to raise taxes now.
Combined with no tax hikes, that amount of money, no matter how badly wasted, eventually will move the market.
Consequently, if the Citigroup situation gets stabilized, we would expect the market to stop falling and perhaps rally over the next few months.
If, on the other hand, Citibank were to go down and the market were to continue falling in the face of that stimulus package, we would likely be headed into a deflationary scenario.
Let us therefore hope that Money Moves the Market.
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