Bespoke Investment Group

Presidential First Years: Stock Market Returns

While his detractors will argue otherwise, based on his first year in office, Barack Obama has been a good friend to the stock market.  Since 1897, the 33% return in the DJIA during his first year in office has been better than every other President except FDR, who saw a first year rally of 96%.  While conventional wisdom generally says the market likes Republicans better than Democrats, history suggests otherwise - at least during a President's first year.  Since 1897, the median return of the DJIA during the first year of a Democratic President's term has been 22.6%.  Under Republican Presidents, however, the median return of the DJIA has been a much more modest 0.4%.

 
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Health Care Stocks and Tuesday's Election

As Tuesday's sector performance highlighted, the prospects of a Scott Brown victory in the Massachusetts US Senate race put the passage of Health Care reform in serious doubt.  On the day, Health Care was the top performing sector with a gain of over 2%.  However, long before Scott Brown pulled ahead in the polls, the Health Care sector had already bottomed in terms of relative strength vs. the S&P 500.  As shown in the chart below, Health Care's relative strength bottomed back in mid-October when it became clear that any legislation that actually passed would be severely watered down.  For investors who were long the Health Care sector, the recent reversal in the polls just made an already good situation even better.

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2008 Election -- One Year Later

Today marks the one-year anniversary of the historical 2008 election.  Since the close on November 4th, 2008, the Dow Jones Industrial Average is up 1.52%.  When you think about how far markets were down in early March, the fact that the Dow is now up over the last year is pretty amazing. 

Below we highlight the performance of the Dow one year after all Presidential election days since 1900.  As shown, the average one-year change has been 4.39%, and the average for first-term Presidents has been 6.17%.  Democratic-elected Presidents have averaged a slightly lower gain than Republican-elected Presidents but not by much.  The average one-year change for a first-term Democrat has been 7.71%, so the current gain of 1.52% following Obama's win on election day underperformed the average.  But again, compared to where we were six or seven months ago, any gain seems like a win to us.

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Intrade Election Odds

For those following the New Jersey and Virginia gubernatorial races and the NY-23 special election, below we provide the odds that traders on Intrade.com are putting on various candidates.  New Jersey governor John Corzine had a significant advantage over Chris Christie heading into today, with his odds to win at 70%.  With polls out today showing Christie up by 2 points, Corzine's odds to win have now dropped to 50%.

The odds for Republican candidate Bob McDonnell to become Virginia's next governor are all the way up at 98.5%, so traders are betting that tomorrow's contest will be over before it starts.  And in the race for the NY-23 representative replacement, traders are giving Conservative party candidate Doug Hoffman a 70% chance of winning as of now.  With Republican candidate Scozzafava dropping out of the race over the weekend, people are betting that her supporters will move towards Hoffman instead of Democrat Bill Owens.

While tomorrow's elections will be nothing like last year's, it will be interesting to see how things turn out and whether they will have any impact on markets.

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Washington's Action (or Inaction) Speaks Louder Than Words

No matter where they sit on the political spectrum, politicians and voters can generally agree that the key to economic growth is in small business.   Throughout their campaigns last year, both Barack Obama and John McCain drove home this point all the time.  With politicians seemingly in agreement on the importance of small businesses to the economy, it is ironic that many small businesses are stuck in a holding pattern waiting to see how the actions of these politicians will impact their businesses.

As discussed in today's Wall Street Journal ("Political Uncertainty Puts Freeze on Small Businesses"), small businesses across the country are holding off on expansion or adding jobs due to "uncertainty created by Washington's bid to reorganize a wide swath of the U.S. economy."  Whether it's the health care debate, taxes, or the impact of climate change legislation on energy prices, business owners are finding it increasingly difficult to effectively plan for the future.  As a result, they are hunkering down and putting any plans for expansion on hold.  The end result is that the magnitude of any economic recovery will likely be muted.

The debates over health care, taxes, and climate change legislation have pros and cons on both sides.  There are certain aspects of the various plans that would be beneficial to small businesses and some that would be burdensome.  For many of them, however, even if the ultimate outcome is unfavorable, it's better the devil you know than the devil you don't.  The sooner the uncertainty becomes certain, the sooner small businesses (and all businesses) can move forward.  For now, it's still just watching and waiting, and it's a drag on the recovery.

Odds For A Public Option in 2009 Tank

Those following the US health care debate know that comments from the White House this weekend dealt a blow to the "public option" aspect of reform.  At the end of July, we posted the odds that traders on Intrade were putting on a "public option" getting signed into law by the end of 2009.  After the White House comments this weekend, the "public option" odds took a big hit, falling from the mid-30s to just 14%.  While it's definitely still on the table, most people seem to think that getting reform with some sort of government-run plan done this year will be tough.

 

Presidential Approval Rating vs Stock Market Returns

Regular readers of the USA Today's print and online versions know that the paper usually does an excellent job of displaying original and informative graphics, but one we saw yesterday was particularly interesting.  The chart showed historical Presidential approval ratings strung together since Harry Truman's Presidency through the present.  The chart provides an interesting look at how Presidents have been viewed by the public throughout history.  If you go to the article, you can also compare approval ratings of each President and other interesting stuff. 

When looking at the complete history of approval ratings, it was hard to believe that even though he left office as one of the most unpopular Presidents ever, at one point George W. Bush's approval rating was higher than any other President in the post-WWII era.  Ironically, the prior record appears to be held by his father, whose popularity also hit its lowest levels near the end of his first and only term.  Likewise, while Reagan has been viewed positively by both Republicans and Democrats, he and Nixon (and Obama so far) are the only post-WWII Presidents who never saw their approval ratings break above 70%.

Taking the USA Today's look at Presidential approval ratings one step further, we added a chart of the S&P 500's year over year (y/y) performance during each President's term to see how a President's popularity was tied to the stock market.  Not surprisingly, there is a strong relationship between the stock market's performance (which reflects the economy) and how a President is viewed.  Presidents who were in office while the stock market was strong typically have been more popular and vice versa. 

In recent history, however, the relationship has been less consistent.  For example, George W. Bush's popularity peaked when the market was weak, and as the stock market improved up until 2007, his popularity continued to decline.  Likewise, while it's still early in his first term, President Obama came into office with an approval rating of 64%, but even though the markets have shown considerable improvement, his approval rating has seen a decline to 55%.

 

Government-Run Health Care -- Will It Fly?

Whether you're hoping desperately for it or praying that it doesn't pass, government-run health care is a major issue of the day.  Fortunately Intrade.com has a contract that allows people to bet on whether or not some new form of government-run health insurance will be approved by the end of 2009.  This gives investors, politicians, the media, and all US citizens the odds that people are putting on its passage.  The contract just opened for trading yesterday, and it has actually done quite a bit of volume already at 501 contracts traded.  It started at 50, but has fallen down to 42, which means traders are currently giving it a 42% chance of passing by the end of 2009.

 

Dem to Win in 2012 Spikes with Market

As the market tanked at the beginning of Obama's Presidency, his odds of winning the 2012 election steadily ticked lower.  But now that the market has surged in recent weeks, his odds to win have spiked to their highest levels since January.  Currently, traders on Intrade are putting the odds at 65%.  We saw a similar trend with the market and former President Bush's approval ratings towards the end of his second term.  If the economy and stock market make a nice comeback over the next few years, it should be easy for Obama to win a second term.  It's a pretty simple formula.

 

Presidential Starts: 1900 - 2009

While there are any number of polls that are taken to measure public opinion of a specific event or policy, for investors, the ultimate gauge of opinion on anything is the performance of the market.  With that in mind, there has been a lot of talk regarding the performance of the Dow Jones (DJIA) so far during President Obama's term.  Upon his election, many in the media and on Obama's staff said that his election would bring about a new sense of hope in the American psyche, much in the same way that other democratic heavyweights such as FDR and JFK improved sentiment in America.  However, based (rightly or wrongly) on the stock market's return so far, this new sense of hope has yet to bear out.

From the time President Obama was elected to his inauguration, the DJIA put in its worst performance over all election to inauguration periods since 1900, with a decline of 17.4%.  And on the day President Obama was sworn in, the DJIA put in its worst ever inauguration day performance with a decline of 4%.  Since then, things haven't gotten much better.  Not including the inauguration day decline, the DJIA has dropped an additional 14.92% since President Obama was sworn in.  Over the last two weeks, these declines have intensified with losses in ten out of the last twelve trading days.

Critics of President Obama have used these statistics as ammunition against his policies, while his supporters have laid the blame on the issues that he inherited.  Both the critics and supporters of the President have valid arguments.  With the passage of time, however, President Obama's ownership of how the market unfolds (good or bad) becomes less debatable, and as it stands now, he is not off to a good start.  Through yesterday's close, the DJIA's performance during President Obama's first 41 days in office is the worst of any President since at least 1900.

     

The Administration has made it abuntantly clear that its main objective is to help make the lives of lower and middle class Americans better.  While their objectives are to ultimately help the lower and middle class at the expense of the upper class, all classes of Americans own stocks either directly or indirectly through 401(k)s and pensions.  As the market declines, all classes lose out, and it's important to remember that the "wealthiest" Americans tend to have the most diversification and access to the best investment advice.  This can help to insulate them from market declines.  While the DJIA lost 34% of its value in 2008, equity hedge funds lost less than half that amount.  Less "wealthy" Americans, especially those with indirect ownership of stocks, tend to have less access to the best investment advice and/or have little or no choice in directing their investments.  Some of the hardest hit Americans during this bear market have been middle class workers who for the last twenty years maxed out their 401(k) contributions under the belief that these funds would be there when they retired.  Now they are looking at a future that is a lot less certain.  Pro-market policies will go a lot further to help the middle class than a stimulus plan that puts an extra $13 a week in their pockets.

Like it or not, the DJIA's performance under President Obama will say a lot in determining whether or not his Presidency is a success or a failure.   Some of the most highly regarded Presidents on a historical basis also oversaw large gains in the stock market, while some of the least popular Presidents such as Hoover, Nixon, and Bush II saw large declines while they were in office.  Gerald Ford's tenure as President also started off on a bad note, when he took over after President Nixon's resignation.  However, during his tenure the market turned around, and by the time he left office the Dow was up 23% over his term.  While Obama said today that he is not 'worried about the day to day gyrations of the stock market,' the decline we have seen recently is anything but day to day or a gyration.  It is a free fall.  Mr. Obama's tenure has just started, and it's gotten off to a shaky start, but let's all hope that the market heads higher during his tenure so that all classes of Americans can benefit.

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A Government Hit To Housing

Regardless of your political affiliation, it's hard to argue that Obama's new health care proposal paid for partially by cutting deductions on mortgage interest won't have a negative impact on the housing market at a time when the administration has said it's trying to help the struggling industry.  Below are links to articles on the proposed tax hikes from various publications:

WSJ: $318 Billion Tax Hit Proposed

Bloomberg: Obama Planned Tax Would Hit Highest Earners Hardest

NY Times: To Pay For Health Care, Obama Looks to Taxes on Affluent

Worst First Month For a President Since Ford

When President Obama was elected last November, many in the press said that the new President would instill a level of confidence not seen since the Administrations of FDR and JFK.  However, after his first full month in office, the market hasn't embraced Obama in anything resembling the way it initially embraced FDR, JFK, or even Bill Clinton.  As shown below, during the first months of FDR's and JFK's Presidencies, the Dow Jones Industrial Average (DJIA) rose by 4.18% and 3.04%, respectively. 

President Obama's first full month in office has been accompanied by a 7.34% decline in the DJIA, which since 1900 is the second worst first month for a President behind the 14.71% decline under Gerald Ford, who came into office following the resignation of Richard Nixon. 

 

Now we realize that just as Gerald Ford wasn’t necessarily to blame for the market’s performance during his first month in office, the declines we are seeing in the market now are not necessarily due to President Obama.  However, we would recommend that he take the advice of former President Clinton, who suggested in an interview with ABC News this week that rather than taking every opportunity he can to talk down the economy, the President should begin to show “that he's confident that we are gonna get out of this and he feels good about the long run."

Investors are looking for leadership, not only in the market, but out of Washington.  Unfortunately, this week it was lacking.  How confident can Speaker Pelosi be about the stimulus bill she spearheaded when she wasn't even in the country when it was signed into law?  Also, at a time when the entire banking sector was on the verge of collapse (once again), the Treasury Secretary seems to have gone into hiding.

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Was There a Plan?

The lead headline on this morning's Wall Street Journal said that the "Market Pans Bank Rescue Plan." Maybe we missed something, but did yesterday's speech contain anything resembling a plan?  To most who heard yesterday's speech, there was little, if any, in the way of details offered, thus leaving the financial sector in its continued state of limbo.  Geithner has now had months to come up with a plan, and whether you think the Treasury should be doing anything or not, the market was expecting something, and got nothing.

 

Oil: Our Biggest Ally

At its current price of $33.52/barrel, oil has moved below its closing low of $33.87 on December 19th.  Along with acting as an effective tax cut for US consumers, at least oil's decline is also causing a severe about face for a dictator who hates the US.  With a few more months of declines, oil could end up getting rid of the all of the leaders of oil-rich countries that dislike the US as their people revolt.  Who would have thought oil could be such a key ally of the US!

 

Securities Transaction Tax: Wrong Idea at the Wrong Time

In an Op-Ed column in this morning's New York Times, columnist Bob Herbert proposes a 0.25% transaction tax on all securities transactions.  Mr. Herbert writes that, "the fees would raise a ton of money, perhaps $100 billion or more annually."  And exactly where would all that money come from?  Who cares, right?  Mr Herbert goes on to say that while the expense would be trivial for individual investors, they could "amount to a big deal for speculators." 

Once again, it all comes down to the evil speculators.  Without even getting into why the majority of this tax burden would end up being borne by the general public, do we really want to put regulations into place that discourage any of the remaining liquidity in our financial markets?

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Stop the Presses: SEC Halts a Ponzi Scheme!

In what could possibly be the biggest 'too little, too late' moment of the century, the SEC announced today that it halted a $23 million Ponzi scheme targeted at Haitian-Americans.  How this one was detected while the $50 billion Madoff scheme slipped through the cracks is beyond us. 

To put the two Ponzi schemes into perspective, tomorrow morning a Federal judge is set to approve the disbursement of $28.1 million in funds in order to just facilitate the liquidation of Madoff's assets.  In other words, the total cost of the Ponzi scheme the SEC actually caught is $5 million less than the initial amount it will cost to liquidate the firm that ran the Ponzi scheme the SEC missed.

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Obama Promotes Fiscal Restraint, Big Spending

Although the Bush Administration promoted fiscal restraint, in reality they were big spenders.  Now it looks like President-elect Obama is peculiarly promoting both.  This Yahoo! News headline from an AP article this morning gave us a good laugh:

 

From the article: A day after introducing the captains of his economic team and promoting a giant jobs plan, Obama on Tuesday was to lay out his budget belt-tightening vision. The dual images — big spender and disciplined budget watcher — were designed to give both political and economic assurances to the public, the Congress and the financial markets.

As we all know, the public was able to see right through the Bush Administration's "fiscal restraint" by just looking at the country's widening deficit over the last eight years.  Eventually they'll be able to see right through the "political and economic assurances" that Obama hopes his financial oxymoron will bring if he tries to promote both as well.

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Paulson Trying To Rewrite His Own History

Treasury Secretary Henry Paulson spoke at the Reagan Library this afternoon, and judging by the speech, it appears as though Mr. Paulson is embarking on a PR campaign to rewrite the history of his handling of the credit crisis.  One line that stood out was when he said, "By pro-actively addressing the problems we saw coming..." 

Judging by excerpts of prior comments the Treasury Secretary made during 2007, if Mr. Paulson saw the problems coming, he wasn't telling anybody.

Marketwatch 3/13/07: Paulson also said the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

Reuters 4/20/07: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."

Bloomberg 5/22/07: Paulson, also speaking to CNBC, said the housing slump was ``largely contained'' and that market's correction was mostly ``behind us.''

Bloomberg 6/20/07: Subprime fallout ``will not affect the economy overall.''

Forbes 7/27/07: Appearing on CNBC with other members of the Bush administration's economic team, he again said mortgage industry problems would be 'largely contained.'

Boston.com 8/1/07: Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was "largely contained."

Another classic line from today was, "As I assess our current situation, I believe we have taken the necessary steps to prevent a financial collapse."  Mr. Paulson, what is it going to take for you to consider this a financial collapse? 

Given that the extent of the credit crisis was underestimated by almost everyone, you can give Paulson somewhat of a pass for missing it.  But to try and rewrite history through speeches even while the credit crisis is still playing out is inexcusable.

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Today's Market Action

The Dow's decline of 5.1% today was its worst post Presidential election day decline in history.  As shown below, today was only the fourth time the Dow ever lost more than 1% the day after a Presidential election day (gray shaded areas).  Coincidentally, all three prior periods occurred during the Great Depression as well as after an election that gave complete control to one political party.  In the table, we also highlight how the Dow did going forward for the rest of the year.  Unfortunately for the bulls, in each prior period the Dow had negative returns for an average loss of 2.1%.

Interestingly, all we heard today was that the market was reacting to a weak ADP jobs report and not the election results.  Yesterday's election was widely touted as the most important election of our lifetimes.  How could the results of the most important election of our lifetimes not impact the market?  We're excited for our new President elect Obama, but the market no doubt has questions about the lack of checks and balances that will accompany him in Washington.

 

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The Day After...Is the Honeymoon Already Over?

One day after the best election day return in the Dow's history, today's early trading has erased a lot of those gains.  In the table below, we highlight the DJIA's return the day after election day for each presidential election since 1900.  As shown, if the early trading holds up, we are on pace for the worst reaction to an election since Truman won in1948.  Interestingly, the only times the DJIA has ever declined by more than 1% (gray shaded areas) the day after a presidential election were when the Democratic Party won complete control.

The average overall return the day after an election when the Democratic Party is elected to total control is a decline of 0.82% (ten periods).  Conversely, the DJIA has risen by an average of 1.28% the day after the Republican Party wins total control of the Oval Office and both Houses of Congress (eight periods).

   

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Presidential Election Day Returns

Given the year of extremes that we have had so far in 2008, it's fitting that the Dow's performance today is on pace to be the best ever one-day return on a Presidential election day.  Since US equity markets began opening on Presidential election days (1984), the Dow has had three up days and three down days.  So today's gain (if it holds) will not only break the tie, but it will also set the record.

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Obama Crushes McCain

ln our last poll before the election results come out tonight, Barack Obama rests handily ahead of John McCain with a 13-point lead.  Of the 569 Bespoke readers who took part in our poll, 264 (46%) said they plan on or already have voted for Obama.  Just 190 (33%) said they'll vote for McCain.  Ralph Nader got 2%, while Other, Not Voting, and Can't Vote each got 6%.  If this is any indication of what's to come this evening, the election will be called before most Americans sit down for dinner.

 

Obama, McCain, or Neither

On the eve of the 2008 Presidential election, please take part in our poll below.  Let's see how close Bespoke readers are to the actual popular vote.

Which Presidential candidate will you vote for (or have you voted for)?
	Barack Obama
	John McCain
	Ralph Nader
	Other
	Not Voting
	Can't Vote
Free polls from Pollhost.com

A Day Off For America Costs $37.8 Billion

As we have all been incessantly reminded by both candidates, this year's Presidential election is "the most important ever."  However, can anyone remember one that wasn't?  Even still, with the election now a week away, we find ourselves in the middle of the greatest financial crisis in at least a generation.  We're neither for nor against Senator Obama, but his recent call for people to "take the day off" on election day might not be setting the right tone for the economy.  In 2007, the size of the US economy was 13.8 trillion dollars.  If the country "took the day off," it would work out to a loss of about $38 billion dollars.  While 37.8 billion dollars may not sound like much to some, at this point, the economy needs whatever it can get.  Instead of saying, "Talk to your professor.  Talk to your boss.  Take the day off," maybe a better message to voters would be, "Set your alarm an hour earlier.  Go vote.  Then go to work."

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McCain or Obama?

With the Presidential election just one week from tomorrow, we are interested in what Bespoke readers want and expect to happen on election day.  Please answer both poll questions below, and we'll report back with the results in the next couple of days.  Thanks for participating!

Who would you prefer as the next US President?
	John McCain
	Barack Obama
Free polls from Pollhost.com

Who do you think will be the next US President?
	John McCain
	Barack Obama
Free polls from Pollhost.com