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Obama Share Scare: Market Drop Shows Vulnerability

Sunday, 24 Jan 2010 04:40 PM

 

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It was the fat cats' fault before. But now it's becoming Obama's.

With the unemployment rate stubbornly high, people were already shifting blame for their economic woes to President Barack Obama one year into his presidency. Last week, investors joined them.

For 10 months, the stock market climbed at breathtaking speed. But the Dow Jones industrial average suffered its worst week since dropping to a 12-year low in early March. It fell 552 points Wednesday through Friday, including 216 on Friday.

One big reason investors scrambled to sell: Fear over a wave of populism that swept a Republican to an upset victory in the Massachusetts Senate race on Tuesday. When Obama responded on Thursday with a broadside against big banks, the market plunged. On Friday, investors feared mounting opposition in the Senate could derail Federal Reserve Chairman Ben Bernanke's reappointment. Disappointing corporate earnings and concern that China will slow its economy added to the jitters.

The question now: If the bad news continues, will Obama, who is trying to win votes in the fall elections with his populist attacks, end up losing them instead? Put another way, can Obama win over Main Street by vilifying Wall Street if people fear opening their 401(k) statements again?

"The longer we're in (power) the more it becomes our problem," said Tad Devine, a Democratic media consultant and former senior adviser in Sen. John Kerry's 2004 campaign for president. He added, "This is a pivot point in the presidency when he needs to reassure voters that their future is secure."

And that's especially true for voters who have a stake in the stock market. For years the number that politicians worried about was the unemployment rate. In the 1970s a second figure was added — the inflation rate.

Now, with 45 percent of households owning mutual funds, up from 6 percent in 1980, there's a third: the Standard & Poor's 500 Index.

It's anyone's guess whether jobs and stocks will be up when Americans head to the polls in November. And even before the events of the past week, the stock market was jittery. Investors had driven shares up at their fastest pace in decades, and analysts said many were looking for an excuse to sell.

A clear sign the market was in trouble came a week ago Friday. Chip maker Intel announced profits were a lot higher last quarter than analysts had expected.

Its stock fell anyway.

Last Tuesday after the Martin Luther King Jr. holiday, the indexes hit 18-month highs in anticipation of Republican Scott Brown's likely victory in the race to replace the late Sen. Edward Kennedy's seat in Massachusetts. Health insurance and pharmaceutical companies led the gains because a Brown victory endangers the massive health care bill favored by Obama and the Democratic majorities in Congress.

But stocks began falling fast on Wednesday when China announced plans to slow its economy. They fell again the next day after Obama's speech calling for limits on the size of banks and their risk taking.

The coup de grace for the market came Friday. In a nod to voter anger at Wall Street, a few Democrats said they wouldn't vote to reappoint Bernanke, whose term ends Jan. 31. But many investors have faith that Bernanke has the tools, the know-how and the political backbone to reel in the unprecedented amount of money pumped into the economy during the financial crisis and avoid a crushing round of inflation. Bernanke still has Obama's support. The Senate is expected to vote on giving him a second term by the end of the week.

The S&P 500 index closed the week at 1,091.76, down 5.1 percent in three days — its biggest drop since March 2009.

Hank Smith, chief investment officer of equity at Haverford Investments in Radnor, Pa., warned investors to expect more stock gyrations.

"The market is overdue for a pause, a pullback, even a correction," he said, referring to a fall of 10 percent from a peak.

This week is chock-a-block with news that could help shares retrace their lost ground, or sink further.

The Federal Reserve meets on interest rates, Bernanke faces that reappointment battle in the Senate, a cavalcade of earnings reports is due and the government gives its first estimate of how the economy performed during the final three months of 2009.

Politicians will be watching the market's reaction closely.

Grover Norquist, the conservative head of Americans for Tax Reform, said the nation's investor class is increasingly calling the shots in elections. He says Obama is hurting himself with his bank bashing.

"A lot of Americans own 401(k)s — and he's just made them a lot poorer," he said, creating "a lot of bitterness" among voters.

Just how much bitterness, if any, voters will have depends on which numbers they fixate on. Even after the recent drop, the S&P 500 is up 61 percent since its low in March, three months after Obama took office. Then again, the index is still 30 percent below its October 2007 peak.

Of course, it's not just Obama. The vote in Massachusetts scared all incumbents. It's now every man and woman for himself or herself in Washington. That helps explain the opposition to Bernanke.

There's another view, too: Policy counts more than ever in this financial crisis, but the market, and the fragile economic recovery upon which it hinges, is still largely the work of big, impersonal forces — even if impatient voters don't see it that way.

UBS economist George Magnus said a big issue today is that banks and consumers, two years after the recession began, still need to rid themselves of debt. And this painful deleveraging could continue long after the salutary effect of monetary and fiscal stimulus runs out, he said.

He doesn't think that's likely to lead to a double-dip recession, but he's not ruling that out either.

"We're in a bungee jump recovery," he said, meaning we're bouncing back from last year's deep plunge. But that could be a prelude to a scary fall again. If so, he said, Obama "will get the blame anyway."

"We're in a bungee jump recovery," he said, meaning the bounce back could be prelude to a scary fall again. If so, he said, Obama "will get the blame anyway."

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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