There are market moments seared into my brain. While most days and weeks blend into an ugly boring collage of flickering numbers on the screen, there are some periods forever burnt into my memory.
Eight years ago was one of those times I have a hard time forgetting. The markets were reeling from the 2008 credit crisis. The economy was in shambles, and markets were even worse. A brand new American President had just been inaugurated, and especially worrisome for Wall Street, his political leanings seemed to be bordering on socialism.
As would be expected, few market strategists were bullish on equities. And in fact, there was quite a lot of hyperbole from pundits recommending selling all your stocks before the bumbling new President crashed the economy. I know he is a blow hard, but Rush Limbaugh’s opinion sums up the prevailing attitude of the time (Rush was much more popular back then):
The Obama recession is in full swing, ladies and gentlemen. Stocks are dying, which is a precursor of things to come. This is an Obama recession. Might turn into a depression. He hasn’t done anything yet but his ideas are killing the economy. His ideas are killing Wall Street. They need some certainty, and now everybody in the Drive-By, ‘We don’t know who Obama is.’
By the way, the news media today, they’re spinning for this. They’re spinning all over the place, what is it, Chris Cuomo today on Good Morning America, (paraphrasing) ‘This market drop had nothing to do with Obama. This market drop is because of bad economic news.’ I even saw, I’m not sure where because I was hustling here this morning, there’s some news agency that reported that Obama is not facing a sinking economy. He’s not facing a sinking economy. That’s exactly right. He’s causing it! He is causing the sinking economy.
He hasn’t even passed anything yet. The truth about this is, the markets work six to nine months ahead. Everybody in the market is trying to figure out where we’re going to be six to nine months ahead. They’re selling and they’re getting out. That 4,000-point drop, that was also due to Obama. In fact, let’s go sound bite number one before we get to Carl Cameron here. This was on CNBC this morning in the Squawk Box show and something they call The Bond Report. Andrew Sorkin from the New York Times, UBS Financial Services director Art Cashin spoke about the Obama transition. The New York Times guy says, ‘Why wasn’t Obama’s attitude toward Wall Street vs. Main Street already baked into the cake? I mean, there’s an expectation Obama was going to win. There’s an compensation he’s talking about Main Street and Wall Street as though they’re two separate things for a very, very long time.’
“Human sacrifice!!! Dogs and cats living together!!! Mass hysteria!!!” - you get the idea. Wall Street strategists were about as negative on the market’s prospects as Lindsay Lohan’s publicist after Lilo’s flying into Los Angeles to spend a summer long week-end with some “friends”.
As President Obama assumed office, most of Wall Street seemed filled with a sense of dread. Few were optimistic, and merely noting it might not be as bad as feared passed as downright bullish.
A couple of months into his term, the press asked President Obama about the negative attitude prevailing on Wall Street. From the NY Times (March 3rd, 2009):
President Obama said Tuesday that he is not intently focused on the “day-to-day gyrations of the stock market,” comparing the downward roller-coaster on Wall Street to the fickle nature of political polls.
“You know, it bobs up and down day to day,” Mr. Obama said. “And if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”
The president did not offer any specific stock tips, but suggested that he believed the market might be close to its low point.
“Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal,” Mr. Obama said, “if you’ve got a long-term perspective on it.”
I remember the day as if it was yesterday, “buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” Gutsy call. Most Presidents avoid making those sorts of stock market predictions like the plague. I remember most of Wall Street laughing at him. Buy stocks? Yeah right… You know even less about the market than you do about governing.
Well, have a look at who had the last laugh…
The stock market has almost tripled since Obama’s comments.
Now before you mistakenly think I am attributing the stock market’s rise with Obama’s performance, let me dispel that notion immediately. The stock market’s rise had more to do with Bernanke’s actions than it did with Obama’s.
And even more important than either of their actions was the price of equities when Obama took office. There are a million ways to measure the “fundamental” price of stocks, but one of the easiest most reliable ways is the total equity market cap as a percent of GDP. Long a Buffett favourite, it is a simple, yet effective method of measuring whether stocks are cheap or expensive.
The simple fact is that in those days following the 2008 credit crisis, stocks were cheap. Dirt cheap. All that pessimism translated into an extremely low price for equities.
In hindsight, Obama’s comments were not that bold. Stocks were so inexpensive, it would have taken a huge depression for stocks to continue declining.
Yet, that is taking away from how difficult it was to not fall into the groupthink that prevailed at that time.
Eight years ago, market participants were as bearish on the stock market’s prospects as they are bullish today. It was the exact opposite of today’s situation. Whereas in 2009 everyone was bearish and assuming the worse, in 2017 everyone is bullish and assuming the best.
The trouble is that eight years ago stocks were stupid cheap, today they are now insanely expensive.
And at the end of the day, the price you initially pay for an asset is infinitely more important than any of the policies that a President might enact.
The MacroTourist will be on hiatus for a few days as I head out for my annual CAT skiing trip with buddies. I stupidly signed us up for the “steeps and chutes” program which entails a little bit of skinning on top of the tough skiing. There was a time before my third kid when I was in decent shape, but now I am a fat, out of shape, old guy who has no business making my skiing any more difficult than it already is. To make matters worse, a couple of my buddies are divorced, and I am always shocked at how quickly those guys seem to get themselves into shape… Anyways, wish me luck - see you on Tuesday.
Thanks for reading and see you next week,