The stock market has clearly not had a good week. The Dow Jones average was down 5.3%, the S&P 500 was down 8.4%, and it would have been much worse if the markets hadn’t jumped at the end of the day today, allegedly because Tim Geithner will be named Treasury Secretary (which I called, but it wasn’t that gutsy a call). Yesterday the S&P closed at less than half its high of October 2007. For a chart of the carnage, see Calculated Risk (click on the chart for a larger version).
At this point, stock prices are clearly beyond the short-term liquidity crisis that hit financial institutions in September, and deep into recession territory. That is, share prices will not respond particularly sharply to tactical steps such as individual bailout plans, because the big question is how long and how bad the recession will be. The problem this week was not that all the news was bad, but that all the news was worse than expected. The stock market prices in current expectations about the future, so if a report is bad but not as bad as predicted (say, unemployment goes up but less than forecast), the stock market should go up.
This week:
- New unemployment claims were higher than expected
- The Consumer Price Index fell more than expected
- The manufacturing survey of the Philadelphia Fed was worse than expected
- The Leading Indicators index of the Conference Board fell more than expected
- Oil futures fell below $50 (indicating that expectations of demand are falling)
Partially as a result, Goldman revised its economic forecast down, saying that the economy will contract at an annual rate of 5% this quarter, 3% next quarter, and 1% the quarter after that, which is worse than any forecast I’ve seen (although I certainly don’t see all of them).
For the stock market to stop falling, new data has to come in that is better than expected. Of course, guessing when that will happen is a fool’s errand.
The Baseline Scenario 
If the leaking of the selection of Geithner as Obama’s Treasury secretary has this kind of effect on the stock market, then Obama should quickly formulate his economic policies and slowly leak them out to the public over the next 8 weeks. A slow dribble of future plans for stimulating the economy may just be the kind of good news the market needs to move up on a continuous basis.
The public can virtually be assured that any plan Obama comes up with for dealing with the recession will almost certainly be enacted by Congress, with not much change, once he is in office.
On another matter, I am confused by the market reaction to Citigroup. This is an institution which has over 2 trillion dollars in assets. Even if they are holding billions of dollars of toxic assets which will provide future losses, this can hardly make a dent in such a large accumulation of assets.
I would like to know what effect the plummeting value of their stock has on their operations. Certainly it is not a good advertisement for the company. But, unless they are preparing to issue new stock, I don’t see how it could adversely affect the bottom line, unless people start pulling money out of the bank because of the bad publicity.
(Sorry for all the comments, but it doesn’t seem like many other people are commenting on this blog.)
Tom, I’m certainly no expert, but here’s my take on a few of the points you make.
The rally yesterday was probably going to happen whether the Obama announcement came or not. I’d guess the size of the rally was definitely impacted by the news, but it definitely wasn’t the cause. As James points out the news for the entire week was bad, so any glimmer of hope is going to make more of an impact than it would normally. It also didn’t hurt that there were a huge volume of shorts out there that were ripe for the picking. ;)
I think your idea of the Obama team leaking ideas and new policies is interesting. I agree that we could see more positive effects on the market. In some cases they are doing just that. Bloomberg had an article yesterday that mentioned the Obama team was talking to some bankruptcy attorneys to investigate a prepackaged bankruptcy solution for the US auto makers. Obviously they are going to tread lightly since they aren’t in charge yet, but hopefully the “leaks” will continue to help the Bush administration look at some alternatives.
As far as C is concerned, they are in serious trouble. I’d consider them the chum in the water amid this feeding frenzy. I haven’t seen any specifics as to why they would be in this problem, but I have a few ideas. C was definitely one of the big proponents of the bad asset purchase program. No one really knows what their exposure to these assets, but since they wanted to utilize the program people are assuming the worst. Another issue is the failed acquisition of Wachovia. We don’t really know what they would have done, but assuming the main reason was to gain access to their strong deposit base is probably valid. So that for some people kind of brings their $2T into question compared with what their liabilities are.
I agree there definitely aren’t enough comments on this blog, its a great resource and James always has good insight into the current situation.
Gli, thanks for the response.
I think it is pretty obvious now that Obama is doing his best to settle the markets. A NYTs article describes what he announced today in his radio address.
“President-elect Barack Obama said Saturday that he had started work on a sustained, two-year economic stimulus plan designed to create or save 2.5 million jobs, funnel money toward public works programs to repair the country’s failing infrastructure and invest in alternative energy programs.”
And, “The announcement by Mr. Obama is seen as an effort to calm the tumultuous financial markets.”
The article is “Obama Vows Swift Action on Vast Economic Stimulus Plan”, http://www.nytimes.com/2008/11/23/us/politics/23obama.html?_r=1&hp.
It should be interesting to see how the markets react to this announcement on Monday.
This should not, however, relieve the Bush administration and Congress from doing anything before the end of the year.
They could certainly enact a mortgage modification program, as well as pass a small stimulus program containing grants to states. Also the banks may need larger investments to ease the credit crisis.
The market will react when Obama starts talking and taking action on topics that Bush stressed at APEC today…
http://news.yahoo.com/s/nm/20081122/pl_nm/us_apec_bush_15
Shame – for all of us – this is coming too little too late for Bush.