One of the interesting aspects of the strategist’s job is the ever-present question: “Why is the market doing X today?” Brokers, clients, reporters, and traders all want an answer to this question that is 1) brief; 2) simple; 3) makes intuitive sense, and 4) helps to position portfolios or write an article.
Unfortunately, easy answers are often not very accurate ones. Oversimplifying “what and why” often distorts the complex factors impacting capital markets. When discussing their behavior, it is more accurate to discuss the many subtle and intricate inter-relationships between a variety of factors. These include investor sentiment, interest rates, valuations, money supply, mutual fund flows, growth, commodity prices, corporate profitability, momentum, technicals, tax rates and currency action. And to make matters even more complex, every one of these factors independently impacts almost all of the rest. It is as if the stock market is a fun house hall of mirrors.
No one, of course, wants to hear that answer. Such is the penchant for turning complex multi-variate systems into buzzwords. Single word answers like “Overbought! Earnings news! Momentum! Headline Risk!” seem to be the more satisfying, if less accurate, responses. These Pithy phrases have practically become de rigueur amongst commentators.
As this is a year divisible by four, the obsession with simple yet inaccurate answers is gathering momentum. Politics is the latest offender: The market is doing ____ (fill in the blank) because of “Dean/Kerry/Bush.”
The foolhardiness of this quasi-analysis should be obvious. And yet, it seems this useless chatter never ends. The risk to investors comes from acting on foolish interpretations of market activity vis-à-vis the political sphere. It is an expensive hobby for investors to base investment decisions on rationalized political perspectives of rallies and sell offs.
The market is a future discounting mechanism, not an oracle of the future. Some examples: The Iowa Electronic Markets failed to “predict” Howard Dean’s implosion or John Kerry’s rise. As some tried to blame the recent sell off on Kerry’s threat to the incumbent, these same pundits were noticeably silent on why Ralph Nader’s announcement a week ago failed to ignite a Pro-President Bush rally.
Regardless, it is far from proven that Presidents from either party are better or worse for the market. The reality is that no single factor is outcome determinative in the markets. That includes U.S. Presidents, also.
Simple analysis: the 2004 Presidential election will turn on economic issues — notably, jobs.
Complex analysis: While a number of other issues will continue to get media play — the Iraq situation, the National Guard story, Gay Marriage — I’m not convinced that these are outcome determinative. They will very likely reinforce partisan views, perhaps moblilize one side or the other. They may impact some (but not many) swing voters. Perhaps the negative issues softens up the incumbent up a bit, and distracts his team from pursuing their own media agenda.
But none of these are unequivocably conclusive.
Tactical considerations aside, these are not the strategic issues (and I’m all about strategy) which will swing an election. More likely, these issues offset to some degree the awesome advantage incumbency gives a sitting President. But I remain unconvinced they will swing the election.
On the other hand: Two charts demonstrate where Presidential vulnerability lay. The first, from Thursday’s WSJ, shows the increasing job losses in rust belt state Ohio. As much as the Dems would like to blame this on W., its part of a longer term trend going back decades. The past few years do look particularly awful, however:
This is not the chart which will swing the election. Manufacturing jobs have been leaving the Mid-West for a long, long time. And while it probably is not a good election strategy to say, “Hey, that’s global trade for ya!” — just ask Greg Mankiw — this is by no means a new phenomena.