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November 06, 2008

Comments

Nato

So until the evening of Nov 4 the market didn't think Obama would win? Come on, the market is not that stupid; if there was a surprise on Nov 4 it was mainly that Stevens (probably) retained his seat and, to a lesser extent, Coleman held off Franken, giving the Dems a slightly smaller majority in the Senate than expected. But I doubt the market's fall has anything to do with that, either. A bunch of negative economic data and dour forecasts have come out in the last couple days. Maaaybe that's why the market isn't so happy. But, if you wanted to blame the slide on Obama, how about saying it's because he chose Rahm (a major player in the bailout) for his CoS, and the market, being anti-bailout, doesn't like that. But I'm not aware of the market being anti-bailout, so that would take some interesting justification.

Tom

Hmm... the dollar gained against most of the World's currencies. I wonder where that money came from? Also, why would investors buy dollars if they're scared of an Obama administration? Shouldn't they be selling dollars? I'm confused Mr. Highfalutin Degree.

Nathan Smith

OK, these objections are easy to answer.

To Nato: Yes, markets thought Obama would *probably* win. But they didn't know for sure, not till Nov. 4th, and they might have thought his margin would be smaller, which could affect his agenda. So the election result *WAS* new information. It would be interesting to see what the Dow would be at now if McCain had won. (I'll keep my guesses to myself rather than be mocked by the not-yet-disillusioned, and tantalize any share owners among my readership with sweet might-have-beens.) As for the numbers, the productivity numbers were favorable, as far as I understand, some others maybe a bit worse. I guess you can appraise the plausibility of a routine report being more important than a presidential election however you like, it's up to you.

To Tom: Yes, the dollar is still regarded as the safest investment, so when there's bad news, investors flee to safety. Same reason the dollar rose during the financial crisis earlier. I'm not saying Barack has turned us into a banana republic! (Yet.)

Hey, I could be wrong! There's plenty of time yet to see whether Obama's presidency turns out to justify the markets dropping 1,000 points in the first two days after his election.

Nato

If it's just the confirmation of Obama's impending presidency, then usually the correction would happen overnight. After all, what happened is pretty close to what the most reputable projection sites were predicting, and what little divergence there was turned out mostly in the GOP's favor. The only reason the DJIA would keep steadily sliding is if the market was steady assimilating additional events or information. What are those things? What is Obama doing that is frightening the market so much it's been behaving like... it has for a month now? If one is determined to read tea leaves in the current volatile market, I'm sure some sort of answer will be forthcoming, but does it have any clear relationship with any particular political event?

Nathan Smith

Yes, the stockmarket sunk a lot in October and has been quite volatile-- that's why it's plausible that it was NOT the Obama win that caused the slide. But it had been on a rally for several days and volatility was going down. This statement:

"If it's just the confirmation of Obama's impending presidency, then usually the correction would happen overnight..."

is a form of hair-splitting that somewhat overstates the rationality of markets. Certainly a presidential election is the sort of event that markets don't encounter that often, and they could definitely take a couple of days to price it in-- hearing his statements, and maybe revisiting his platform a bit more.

It's always hard to know exactly what caused this up or down in the markets. I'd say the following: If market volatility settles down to a lower level soon, but at the levels after the post-Nov. 4th drop, that will suggest the fall was pricing in the Obama win. If we continue to see big market volatility, it will look more like the stock market movement was pricing in routine economic data. If the stock market moves back to its pre-Nov. 4th levels soon and volatility falls so that the market has stabilized at that level, that will look like the market got spooked by the Obama win but, upon reflection, decided it wasn't so bad. Of course, all this is quite speculative. Even a professional event study probably couldn't get to the truth of the matter-- event studies can be effective in analyzing the effect of, say, an earnings report, but much less so for something with ramifications as broad and complex as a presidential election -- and my speculations should be discounted much more.

The markets are up a bit so far today. If they rebound, maybe the money men are betting Obama will be the next Clinton.

Also, it might not be Obama's fault; it could be something about the Congressional race.

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