Obama effect on Dow
Tannen Maury, Pool/AP

Markets Go Into Post-Obama Inauguration Swoon

January 20, 2009 04:58 PM
by Anne Szustek
After a short trading pause, the Dow dropped 332.13 points, closing unofficially at 7,949.09. History shows that we should expect to see market volatility during a presidency's early days.

Inauguration Does Not Stop Dow from Dropping Below 8,000

Trading on Wall Street was halted in honor of President Barack Obama's inauguration during the noon hour on Tuesday. But despite optimism in the financial sector for a turnaround in the current recession, the Dow dropped more than 300 points, 4.01 percent, to end the day unofficially below the 8,000 benchmark.

Financial sector stocks took a beating, led by Boston-based Bank State Street, which saw its share price drop nearly 60 percent after the company reported net income of "$65 million, or 15 cents per share, compared with $223 million, or 57 cents per share, a year earlier," reported CNBC. "Analysts had expected 58 cents a share."

Losses of 20 percent or more were seen by Citigroup, JPMorgan and Bank of America, the last of which is poised to cut as many as 4,000 positions from its capital markets division.

Despite news that Mexican telecom billionaire Carlos Helu Slim was investing $250 million into The New York Times, shares of the paper also fell slightly. Also in the media sector, shares of Time Warner fell slightly amid news that it is laying off about 10 percent of its staff over the coming weeks. 

The Nasdaq also closed down, posting a 5.78 percent loss to end the day unofficially at 1,440.86 on the back of heavy sell-offs in major technology sector stocks, including Google, Microsoft and Apple, according to Reuters.

The S&P 500 unofficially closed at 805.22, down 5.28 percent, or 44.90 points, from the opening bell.

Market volatility on the first day of U.S. presidential terms is nothing new, however.

Background: Financial world has high expectations for Obama's presidency

Clem Chambers, the CEO of ADVFN, said Jan. 8 on CNBC that, although he predicts that volatility will characterize the financial market in 2009, optimism over the incoming administration of President-elect Barack Obama could help push the Dow back up to the 11,000 level soon.

“I think we can see the Dow between 10,000 and 11,000 in relatively short order, but whatever happens going forward I think we’re going to have a strong year this year,” said Chambers.

“It’s going to be incredibly turbulent, there’s going to be lots and lots of volatility, but we’re going to get an Obama bounce,” he continued, going on to say that he predicts the Dow would then correct to 10,000.

The same day Chambers made his predictions, Obama delivered a speech at Virginia’s George Mason University outlining his economic stimulus plan, and the Dow, Nasdaq and S&P 500 all nudged up slightly from the opening bell.
The markets have bounced back some 20 percent since November, when Obama was elected, largely on the announcements of his star-studded economic advisory team, including New York Federal Reserve Chief Tim Geithner as Treasury Secretary and Paul Volcker, the head of the U.S. Federal Reserve during the Reagan years, as the chairman-designate of the newly formed Economic Recovery Advisory Board.

But, as Reuters puts it, the current economic climate may “dim Wall Street’s honeymoon with Obama.” Consumer sentiment on top of a dire job market may weigh more heavily on the minds of investors during the early weeks of the Obama presidency, rather than the fact that there’s a new commander-in-chief.

“I think we’re torn between optimism (about) the new administration and stimulus plans and the awful economic outlook,” Frank Lesh, a futures broker and analyst with Chicago firm FuturePath Trading, told Reuters.

Historical Context: Market conditions during prior presidential inaugurations

As is the case with Obama, former presidents Franklin D. Roosevelt and Ronald Reagan both inherited sluggish economies.

As Roosevelt assumed the presidency on March 4, 1933, the United States was in the depths of the Great Depression. A few days earlier, On Feb. 27, 1933, the Dow stood at 50.14. Banks were collapsing left and right. The situation was so dire that the newly sworn-in president’s first economic move was to institute a bank holiday.

Reagan’s Jan. 20, 1981, inauguration came during the throes of stagflation that characterized the U.S. economy during the late 1970s and early 1980s. In addition, a few hours before he was sworn into office, the Iran hostage crisis had been resolved, so even without a new presidential term in the offing there were factors potentially weighing on the markets. Nonetheless, the AP reported that day that the Dow was “up slightly at noon as Reagan was sworn into office, tumbled after that and was down 20.31 to 950.68 when the market closed four hours later.”

In the following days, leading up to Reagan’s speech unveiling his economic proposals on Feb. 18, 1981, the Dow fluctuated between 932.25 to 966.25. The Dow had an average level of 944 over the 21 trading days during that period, meaning that the market see-sawed some four percent during the first few weeks of the Reagan era.

Certainly this didn’t characterize the entire Reagan administration, considering the go-go legacy of the 1980s. But fast-forward to the early days of another two-term president who inherited a recession.

Over the first 20 trading days of the Clinton administration, the Dow hovered in a 200-point range: “3,442.14—its record high—to 3,241.95—the day of his inauguration,” reported Ohio’s Columbus Dispatch on Feb. 18, 1993, the day after new President Bill Clinton made his first economic proposals speech. “That 200.19-point spread amounts to 6 percent of the average Dow value for the period of 3,342.27.” As with Reagan, this volatility was hardly a precursor of the economic conditions of the Clinton presidency as a whole.

Looking over the Dow in the early days of several administrations over the past half century, market trepidation seems to be the norm rather than the exception.

Wrote the AP in 1981, “The Dow Jones industrial average fell 9.64 to 959.03 four years ago when Jimmy Carter was sworn in and had dropped each time a new president had taken office since 1963. The last inauguration day to see a rise in the Dow—1.98 to 634.37—was Jan. 20, 1961, when John F. Kennedy took the oath.”

Opinion & Analysis: Setting a precedent for 2009

Reuters cited the Stock Trader’s Almanac on Jan. 12: “The first five trading days of January are often an early sign of how the year will end.” And the S&P 500 fared well during the first full week of trading in 2009: the index “closed up 0.34 percent at 909.73 on Thursday, and is up 0.72 percent for the year.”

Yet consumers’ scramble to save, due in large part to the tight credit environment as well as fears over job losses, has prompted worries over deflation.

Nonetheless, some share Clem Chambers’ optimism, believing that the downturn offers key opportunities. “It would really take amazingly terrible data to get the stock market much lower,” Wells Capital Management chief investment strategist Jim Paulsen told Reuters, pointing out economic downturns don’t spell drawn-out financial demise.

Reference: U.S. economy, investing


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