MONEY AND WORK

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March 10, 2009

WHAT'S THE MARKET TELLING US?

Sam Smith

The only people having a good time with the stock market these days are the political spinners. At issue currently is whether this is an Obama market.

One way you can make it look that way is to only look at the 2009 figures. This is what MSNBC has done a couple of times. But the fact is that the market peaked in mid October 2007.

In effect, it's a kind of pay back for Bush, though, since his first bear market and economic troubles actually began in the spring of Clinton's last year - included a stunning collapse of the over the counter market - but was universally blamed on him by a pro-Clinton media.

Now, once again, it's the guy who entered late who is being blamed. On the other hand, the drop in the Dow since Inauguration Day has been 20% and since election day it's been 29%, a pretty astounding way to begin a new era of hope. The last time anything close to this happened was the 18% drop after Gerald Ford took office following the departure of the disgraced Richard Nixon.

Fact and folklore on the markets as economic indicators and predictors is substantial. I remember reading once that if both Time and Newsweek featured the bear market on their cover the same week, the downtown was about over.

One useful way to look at it is that the markets are a form of gambling and gambling is about what's going to happen in the future: will it be a face card or higher unemployment? Because there are so many players involved, the markets inevitably become an expression of optimism or pessimism - not that of the public at large but of a segment with substantial influence over the economy. If your uncle doesn't hire anyone and doesn't play the markets, what he thinks about the economy will have less effect on both than, say, someone with 70 employees and cash in the market. In this way the markets are both less democratic and more indicative than, say, a Gallup poll. The thing that will turn the economy around will not be a popular referendum but a broad acceptance by a small segment of the population that it's worth investing, hiring and expanding again.

Mike Walden, North Carolina Cooperative Extension economist at North Carolina State University, has described it this way:

http://www.ncsu.edu/project/calscommblogs/economic/archives/2008/05/the_stock_marke.html

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The stock market will always look at what is expected. That is, they factor in facts and statistics that they think are going to occur. And so, for example, when the news came out recently about the unemployment rate going up and faster inflation, the stock market already expected that. So in street lingo - Wall Street street lingo - they had already priced those changes into stocks. So it wasn't a surprise.

The second thing is that the stock market is always looking ahead. The unemployment rate goes up. It's already happened. We know that. So the stock market is really not looking at the unemployment rate. They're trying to look ahead. Where is the economy going to be three months from now, six months from now? And, indeed, . . . when we had the bad news about jobs and inflation, there was actually some good news that came out about corporate earnings. So this actually caused the stock market to think, hey, maybe the bottom's been reached on the economy and we're going to be much better off down the road. So keep these two things in mind about the stock market. One is that the stock market reacts to the unexpected, not to what is expected. And secondly, the stock market is always looking forward.

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As I write this, the Dow is up four percent not thanks to a political policy but to a statement by the CEO of one of America's worst run businesses, Citigroup. Things are going better there. How many hours it will last is uncertain, but what you can say Is that nothing emanating from the Obama White House has had as much immediate effect even when backed by hundreds of billions of tax dollars.

A fair summary would be that Bush caused the recession and Obama can't figure out how to get us out, and the markets know it.

His solutions have tended to be ethereal rather pragmatic; they have emphasized creating financial rather than human bailouts; they have not been decentralized enough that the public can see them; they have failed to significantly help that major job producer - small business; they have been top down rather than bottom up; they have been too indifferent to those hurting most; and they have not sufficiently emphasized job creation and new economic development.

You can't bailout the biggest and worst banks and expect to have the executives of smaller and more careful ones not to share their bitterness with colleagues over lunch at the Chamber of Commerce. You can't expect small business to hire new workers when they can't see any progress in their towns. And you can't turn around an economy without turning around the psychology, spirit and visual evidence for those who have to lead the move.

Perhaps it will change as some of Obama's cures begin to work. Or perhaps it will change because all over America it will seem that it can't get any worse so things can begin again. Watch the markets because chances are - and only chances - they will be one of the first harbingers. But for the time being, it is not fair to call it an Obama market because he doesn't seem to be able to affect it much at all.

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