How to Kill a Rally by Washington DC

On Tuesday the S&P 500 made a new bull market high, which put the index up 70% since the March 9th low.  In just two days, the folks in Washington have done a number of things to stop this rally dead in its tracks and put the recovery in question.  Ever since the Scott Brown Senate victory, politicians on both sides of the aisle have become stressed out about their personal futures, and they are now beginning to change their tunes.  In poker, they call this "playing on tilt," and right now it seems like many down in DC are on tilt.

First, there is now a worry that the Senate will have a tough time raising the debt limit.  There is likely no shot that this won't happen because its implications would be dire for the U.S., but nevertheless, it is a very unpopular topic right now and even a hint of a failure to pass this can get investors nervous.  Second, questions are surfacing over whether or not the Senate will be able to confirm Bernanke.  It is also likely that the Fed Chairman will eventually be reconfirmed, but investors are comfortable with Bernanke, and any doubts regarding his status are worrisome (after comments from both sides of the aisle today, maybe it isn't likely anymore).  Finally, the administration launches an all-out attack on Wall Street, seemingly acting tougher towards bankers than terrorists.  Many large-cap Financials took it on the chin yesterday (as shown below), and an attack on Wall Street is essentially an attack on the stock market since those working in the Financial sector are the ones making the majority of investment decisions.  (On a side note, we find it quite amusing that the government made sure it exited most of its positions in financial firms before announcing its new proposals.)  And given the fact that more than half of Americans own equities in some form or another, an attack on the stock market is an attack on Main Street.  Something needs to be done about "too big to fail," but rather than work together, the administration seems to have unilaterally decided on what needs to be done without consulting any of the parties involved.  Based on Barney Frank's comments yesterday, it also appears that members of Congress in the President's party were also left in the dark.  Add these three things up and you get a two-day decline of 3% for the S&P 500 and a break below the 50-day moving average this morning.  While there are some other things at work contributing to the declines (China worries, dollar rising), we believe the majority of it is due to what's going on in DC.

It is likely that none of the three things mentioned above will even play out, so we're treating the sell-off as a short-term correction that will offer buying opportunities.  However, it's never good to get investors riled up and leave them in a state of uncertainty, and that's exactly what Washington has done this week. 

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Comments

[Frank]

'Kill' a rally. Are you kidding me??? The mkts are up 70% as you noted since March and a 300 pt decline has you so flustered calling a rally 'Kill'.
Very disappointing article trying to desperately find a story to justify price actions.

[Rational Market]

Do you believe bank holding companies should be allowed to borrow from the Federal Reserve at 0% and then utilize that capital to buy S&P futures or other assets for their own account? If so, your a moron. The Volcker rule has been a policy alternative for over 6 months but the major Wall Street banks incorrectly assumed they would be able to do business as usual despite holding the US taxpayer hostage. Your statement that Obama is seemingly acting tougher on bankers than terrorists is despicable and proves that your completely out of touch with reality. Investment banks like Goldman Sachs simply need to relinquish their bank holding company charter and can continue doing business as usual without having access to the Fed window and other lucrative taxpayer subsidies. Why does this constitute an all out attack on Wall Street? TBTF banks are down because investors are correctly pricing in the risk of higher funding costs. Are the regional banks ramping because Obama is attacking Wall Street? No, they are rallying because the TBTF funding advantage will disappear, which has totally blindsided the popular Long To-Big-to-Fail/Short Regional pair trade. Most of the country agrees that Obama sucks but for the exact opposite reason as you; Obama's financial policy to date has been way to easy on the largest financial institutions. So, take off your tinfoil hat and stop blaming the weakness in the market on DC. You argument would hold zero water if you put up the performance of the regional banks as well. Your political rant is not helping any of your readers make money.

[tilo]

I must say, this is by far one of your weakest posts. Keep your politics to yourselves, please. These political diatribes always come off as highly unprofessional, much like CNBC’s explanations.

Reminds me of the post you made about "Obama (dis)Approval" measured by the drop from Jan to Mar, right on the cusp of the greatest bull run in history.

[Joe Jibroni]

Classic example of imbeciles reading what they want to read. This post talks about three things - 1. debt ceiling 2. Bernanke and 3. potential changes in regulatory environemnt. All three as reported are UNQUESTIONABLY negative for the market and large cap financials. Yet all three commenters want to focus on the alleged Bespoke attack on Obama. Politics aside, the market is almost certainly correcting downward because of those three issues. Whether or not regional banks are up or are outperforming is irrelevant. Broadside attacks on large banks for political gain (not economic gain) will be bad for markets. Period. If you think Bespoke is too hard on Obama in particular, then get a grip. Otherwise, just absorb the point --- that Washington is making investing MUCH more difficult.

[Rational Market]

Joe, my comments had nothing to do with Obama other than I thought it was patently absurd to say that Obama is tougher on bankers than terrorists. How can you say the regional bank rally is irrelevant? Regional banks are rallying BECAUSE the regulatory environment may be changing. The regional banks are rallying precisely because the new regulatory environment MAY not provide the to-big-to-fail banks with a significant funding advantage. A banks cost of capital is a huge driver of its earnings and stock price. The policy is intended to level the playing field! Why should the big banks be able to borrow from the Fed at 0% and then utilize that capital to speculate in asset markets? Do you really think the market is worried about the debt ceiling? I agree that Bernanke is clearly a issue today given the shifting political landscape. But the Volcker rule will not make investing much more difficult unless you finance your prop trades with 0% loans from the Fed.

[Action Sports]

tilo,

Are you saying that the comments of the administration did not contribute to the decline in financials yesterday? Maybe the decline would have happened anyway, but it is not outlandish to say that investors reacted negatively to the rhetoric.

I remember a Bespoke post from last month titled "the Obama Bull Market," which showed that the market has done better for Obama in his first year than any President since FDR. This tends to refute that Bespoke is trying to score partisan political points, which is what your post implies. The Obama (dis)Approval post did not predict that the market would continue to decline. Instead it merely showed the facts: that the first month and a half of the this administration was terrible for stocks.

[tilo]

Action Sports,

Markets are much more complex than an aggregate linear reaction to well known "news." I know CNBC does not grasp this concept, I thought Bespoke does. The market did not fall from Jan to Mar 09 because of disapproval to Obama's policies, nor did it rally since due to an overwhelming approval.

Aside from that, the language of the post was emotionally charged ("kill the rally"; context and proportion: after merely two days of mild declines at the end of the strongest rally in history).

The Big Picture had once wrote in reference to Bespoke's (and others) tendency to reduce and simplify market complexity in such a manner. It was a worthwhile post, so I will not repeat its salient points.

> “Classic example of imbeciles”

Joe,

Please avoid littering the public domain. Thank you.

[Ben]

This commentary is idiotic. Bespoke should keep its simplistic ideology out of its number crunching. Its (brainless) political beliefs don't constitute interesting financial analysis.

[duvar kağıdı]

Thanks for good text

[David Merkel]

Your points were modest and entirely reasonable, Bespoke. Please ignore the static of those that think can't let politics edge in now and then. They are thin skinned.

[Ed Lane]

Here's one more vote for keeping political bias out of maket commentary. Politics does influence markets, but spin another thing.