Saturday, February 28, 2009

The Market and The President

A friend who says her family is now "running on fumes" because their investments have almost vanished, wonders why the market has not responded to the President's message of hope and change. "What spooked the market?" she asks.

First, I hope the PC police do not jump all over her for a question whose vocabulary they might think has racial overtones. Next, I suggest the answer is uncertainty. For investors uncertainty and risk are synonymous.

People do not take risks (which is what investing is) when they don't know what the tax rate will be next month or next year. They don't invest when they are uncertain if government is going to compete with the company they want to invest in. (Think $634 billion President Obama is going to spend somewhere on health care. Think billions he wants to invest in some forms of energy but not others.) They don't invest when massive government deficits and unchecked printing of money are likely to cause rampant inflation.

Not only do they not invest, they sell a lot of investments. When uncertainty and pessimism cause more selling than investing, the market goes down. The millions of people who make up the market may be wrong about the President's proposals, but they are not playing with monopoly money. Most are risking their own money or money someone has put in their trust. Many have been entrusted with the pension funds of millions of Americans, funds already cut in half.

Investors are sending a very clear message--even those who like the President personally are not yet willing to invest in the changes he has proposed. I would ask my friend whose family is running on fumes whether she is investing now. It's one thing to vote for change, another thing to bet your money where you put your ballot.


  1. Investors don't like risk? Says who? Oh, you must be thinking of investors like you and me, small spuds. Don't you think institutional investors are just waiting for someone to start the next upward spiral and then they'll jump aboard regardless of whether the politicians have decided whether to move on any of Obama's plan? Actually, that is almost a testable hypothesis -- will the market recover before there is more certainty about which industries Obama's policies will distort? I'll bet (your money, not mine) that the market will recover before much is done about health care, tax rates, energy. And, hey, this blog is a great idea. I am going to add it to my favorites list. Jake

  2. Good point--we not only have a testable hypothesis but the money for a real world test, actual investment money, sits waiting for its managers to make a decision about risk and reward.

    The market is already testing your hypothesis: investments are starting in those industries where there is high certainty that the government will "invest" (some say subsidize or simply spend). A company like Shaw Group (SGR) has risen considerably on the certainty of infrastructure spending. Solar stocks are beginning to see some investment. Same for some wind energy companies. An example is Florida Power (FPL)where there is the relative stability of a traditional utility, plus a sizeable portion of the company invested in wind.

    If the market begins to rise in other areas before the government creates more certainty about where it is going to spend our tax money, one has to ask if people are betting on the business cycle being more certain and profitable than the potential losses to government actions.