Markets

Obama's Quiet Bull Market Charges Past Reagan-Era Gains


From:
“Barry” {Barack H. Obama / POTUS}

To:
Ollie North; Gordon GekkoGary Numan1986 Bears; Keating Five; Max Headroom; Ivan Boesky; Phil Donahue; Philip Michael ThomasBaby JessicaRandolph and Mortimer Duke (72 more)

Bcc:
Julie E. “Tawny” KitaenYes (Owner of a Lonely Heart)

Subject: Won one for the Gipper …

————–

Hi,

Happy October.

Just dropping a line to say it’s official: Your Reagan-era bull market has nothing on mine.

So make no mistake.

Best,
B

(End of message)

* * *

Indeed, President Barack Obama has something to brag about. With the Standard & Poor’s 500-stock index daily setting new records, he can now say he has a better performing stock market than President Ronald Reagan: POTUS 44 is so far up 120 percent, compared to the Gipper’s 118 percent gain over his eight years in the White House, according to data crunched by Rich Peterson of S&P Capital IQ.

That means that the Great Recession and New Normal has so far bested the Decade of Decadence, what with its junk-bond pirates, champagne wishes, and caviar dreams. Too bad Obama is in no position to boast. After all, the economy still needs to recoup millions of jobs to get back to its pre-crisis unemployment rate. Investors aren’t all that checked in, having spent the better part of the Obama bull run yanking hundreds of billions from stocks.

In any case, the great Obama market that commenced just weeks after his inauguration has more to do with lucky timing and monetary powers outside his control than anything emanating from the White House. “It’s tricky for Obama to take credit for this, because so many Americans don’t feel good about the economy,” says Greg Valliere, chief political strategist for Potomac Research Group. “The market is amped up, but its impact on Main Street is modest. If he started sounding triumphant about stocks, it would sound tone deaf to his base, which has not shared in Wall Street’s rally.”

Still, the quickening financial crisis and market collapse of 2008—when Obama looked more even-keeled than his presidential opponent and the GOP’s economic-management numbers fell off a cliff—helped the Democratic senator from Illinois win the presidential election.

Obama took office just as a more-than 50 percent peak-to-trough market decline was coming to an end. The early spring of 2009 featured rampant foreclosures, banks failing left and right, AIG’s (AIG) need for another teat, and Wall Street sweating under the U.S. Treasury Department’s stress tests. Obama very nearly dissolved Citigroup (C) in his first hundred days, when he got high political mileage inveighing against the sins of high finance, with its big bonuses and bigger bailouts. In March 2009, meanwhile, the Dow Jones industrial average visited lows not seen since 1997–or 1966, if you account for inflation.

Then, as if out of nowhere, the market rallied 50 percent, even as unemployment headed toward double digits and the economy hemorrhaged 2 million jobs in six months. That was an unprecedented divergence of fortunes.

LPL Financial’s Jeff Kleintop notes that the phrase, “the New Normal,” accompanied the start of Obama’s presidency as a way to refer to an environment of sluggish growth, high unemployment, low interest rates, and intense government involvement in the economy—all of which promised poor returns for stock market investors. “But while some may fault policymakers—including the President—that growth has been slow and government intervention unprecedented,” he says, “there’s no question that investors have been well-rewarded.”

For that, you can chiefly thank five years of record Federal Reserve largesse. The central bank adopted an emergency zero-interest rate policy at the end of 2008  and has kept the dial there, piling on nearly $4 trillion of creative stimulus for good measure. The ensuing financial repression of chronically low bank and Treasury yields has pushed institutions into risk assets such as junk bonds and equities. Corporate financiers have never had it so easy, issuing and refinancing debt at long, laughably low rates. The stock market, meanwhile, has produced a total return of 188 percent since its 2009 bottom.

There is new evidence of how disproportionately Fed policy has helped wealthy institutional investors and investment banks. Private-equity giants fueled with tens of billions of low-rate dollars are, en masse, acquiring homes that people cannot afford to buy, turning around to renting them out at fat, leveraged margins. Blackstone (BX) is leading hedge funds, buyout shops, and real-estate investment trusts in raising $20 billion in Wall Street-arranged financing to purchase at least 200,000 homes to list for rent. The credit arbitrage is just too compelling for the institutions that can access it.

The flip side of the ledger is that it’s now harder for a median-income household to afford a median-priced home in all of the top 25 U.S. markets, according to Bankrate. Households can afford a home in only eight of the country’s 25 largest metro areas, down from 14 last year. While home prices rose on average nearly 16 percent over the past year, incomes rose by just 3 percent.

So much, then, for the market setting a fresh record today. Alas, with Reagan now in Obama’s rear view, the president is within a few good closes of besting the stock market gains from Dwight Eisenhower’s post-Depression/WWII boom. A rip-roaring bull market over the next two years could conceivably catch Obama up to President Bill Clinton’s record gain of 210 percent, as goosed by giddiness over dot-coms and Viagra (PFE). (Bush, president No. 43, inherited that bursting bubble).

It’s all so coldly comforting for this president, in this particular economy, that you wonder if he’s even keeping score.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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Companies Mentioned

  • AIG
    (American International Group Inc)
    • $55.85 USD
    • 0.23
    • 0.41%
  • C
    (Citigroup Inc)
    • $52.39 USD
    • 0.03
    • 0.06%
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