Obamarkets

Before the election, someone argued that one of the reasons that stocks had lifted from the October 10th lows was that it was becoming clearer that the President would be Barack Obama. I countered that despite the excitement about the election on both sides I did not think that the stock market was trading on politics. Others contended that if McCain were to pull out a come-from-behind victory, that there would be anarchy, an idea that frankly demeans the American people.

Now that we have elected Mr. Obama, I am more convinced than ever that while traders like to know presidential outcomes, last week’s action did not jibe with the clarity of the Presidential and Congressional victories. Indeed, the biggest Election Day rally ever faded quickly, as the subsequent two-day drubbing supplanted “yes we can” with, “maybe we can’t”. Was it disappointment with the Obama victory or a more visceral reaction to the dour economic news and massive hedge fund redemptions? I put my vote on the latter.

In addition to a new president, last week saw additional proof that the economy has continued to deteriorate. This fact was confirmed by retailers whose October same-store sales fell more than they have any time in this decade; the Institute for Supply Management, whose index dropped to its lowest level since 1980; the auto industry which reported that sales skidded to their worst pace since February 1983; and the Labor Department which said that the jobless rate spiked to a 14-year high of 6.5% in October, and another 240,000 jobs were lost, bringing the total number of jobs lost to 1.2 million for the year. It is likely that the convergence of bad news rather than the election spurred net selling on the week for stocks, with all of the major indexes closing down approximately 4% for the five trading sessions.

I am sorry to say that the outcome of the election will probably not calm markets any time soon, rather the antidote to the extreme moves is likely to be found in something simpler: sheer exhaustion could set in. As the excellent Jason Zweig noted in the Wall Street Journal over the weekend, “In the 10 years ended Dec. 31, 2007, the Dow never once swung by more than 9% during the course of a trading day. So far in 2008, with less than eight weeks to go, there have been six such giant swings. Over the entire decade through the end of last year, the Dow bounced around by more than 5% in a single day a total of 14 times. So far this year, that has happened 20 times; what used to take place barely more than annually has occurred once every 11 trading days in 2008.”

Zweig notes that there have been previous times of extreme price movement, but US stocks have not “been this volatile, day after day, since the 1930s.” Like a winded ballplayer, markets will need to take a break from the action to recover. Clearly the election was not the much-needed half-time show.