David Plouffe, the senior advisor to the 2008 Obama campaign, tweeted the following last week, “POTUS has been just terrible for markets/business.” David was being sarcastic, as equity markets have soared over the past few weeks. However, whether Plouffe knows it or not; he is being totally disingenuous. Last week, we examined the Bush tax cuts myth
; this week we will look into the Obama stock market rally myth.
When President Barack Obama took office, the market was plunging. The Standard & Poor’s 500 bottomed on March 9, 2009, only a few weeks into Obama’s first term, in the mid-600 range. Today the market is above 1,500. A knee jerk reaction would be to give Obama the credit since it occurred under his watch. This is misleading at best.
There is a small (and decreasing) school of thought that believes the stock market is efficient. Everything related to companies, the economy, politics, etc. is immediately reflected in equity values. All active investors and many economists have proven this theory false. Furthermore, Obama, who claims to be a Keynesian, would be diametrically opposed to such a theory since it would leave little room for government intervention in the marketplace. Plouffe not coming from this school of thought is clearly pandering, but let us take it a step further.
What caused the market to rally? As someone who followed the market closely, I remember that it was the announcement on March 9 from Citigroup and Bank of America that they were profitable in the first two months of 2009. The statement from both banks, which were viewed as among the unhealthiest, caused the market to skyrocket. Since then, the market has gone up and down, but has never lost momentum.
What about before that? It was NOT the Obama stimulus, which was passed in early 2009 and, even according to the biggest supporters, did not kick in until months later.
In late 2008, under President George W. Bush, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson took actions that are still controversial to this day. Using tools of the Fed and Treasury, they launched a massive bailout of every large financial institution. This set up a moral hazard of “too big to fail,” but most would agree that for better or worse it did save the banking system.
Obama would not even have been able to launch any stimulus package had Bush’s man in Treasury and Bernanke (a Bush appointee) bailed out the banks. Furthermore, stocks and politics do not mix much. The stock market tends to peak when investors get overconfident (2000 and 2007), and trough when investors throw in the towel (2003 and 2009). Valuations were arguably elevated from the late 1990s until early 2009. I was buying stocks in late 2008 and early 2009. Not because I had any confidence in Obama, but rather because stocks were cheap.
Next time Plouffe or another pundit mentions the Obama stock rally, you can answer back that the correct name is the Bush market rally.
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