An ‘Idiotic’ Notion: Market Performance = Obama’s Scorecard

This entry was posted by owl and bear staff on Tuesday, February 24th, 2009 at 2:01 pm.

Nate Silver looks at the fallacy that the short-term market has responded negatively to President Obama’s economic recovery plan.

One of the more unapologetically idiotic notions being advanced by certain conservative commentators is the idea that the poor performance of the stock markets represents a negative reaction to Barack Obama’s stimulus package.

A recent example is above (Chris Matthews: The Dow is Obama’s Scorecard).

Silver continues:

For one thing, the trading markets aren’t gauges of overall economic health. They are gauges of future anticipated profits for the large corporations that make up their components. In the long run, certainly, these two things should be correlated. But they needn’t be perfectly so: an oil price shock, for instance, is possibly good for the profitability of Exxon, while being damaging to the economy at large. Likewise, the announcement of a plan to take over and turnaround Citigroup, perhaps a necessary evil for economic recovery, would certainly not be good for Citigroup’s shareholders, who would probably get wiped out in the process.

Silver says that commentators who cite negative market reaction as “evidence” of the bill’s success are missing a basic tenet of “Finance 101.” Silver asks why the market slumped only after Obama signed the legislation vs. when the bill’s passage looked inevitable. Furthermore, he asks why the market went up after the president announced his plan if traders thought it was such a bad idea.

[What] about November 24th, when Obama rolled out his economic advisory team and prompted the Wall Street Journal headline “Obama Signals Big Stimulus Plan”?…The Dow closed up by almost 400 points.

[FiveThirtyEight]