I'll take on the notion that this was inevitable first. Look at a chart of the Dow for the past six months. That second slide starting in mid-February is quite dramatic, being about the same size as the early October crash but more gradual. This slide began well after companies reported their fourth-quarter results, so it isn't just a matter of finding out how bad things really are. Likewise, it doesn't seem to align with major economic reports, like the dismal monthly jobs reports. The stimulus package is also off the table as a cause--the market didn't start its new leg down until after it was signed and well after the broad outlines were known. The weird thing about the drop is that is so steady and relatively gradual. There's no big crash, like there was in the fall, just a drip-drip-drip of bad days that adds up over time. On that basis I'd also exonerate the budget as a primary cause. Obama rolled out the budget in a fairly short time, and it had a lot of surprises. If it were to blame, there should be a sharp drop, but there's not. Instead, the market is acting like there's a "buyers' strike," where no one wants to make new investments, while the usual reasons to sell remain in place. Under those circumstances, stock prices gradually deteriorate. Why? First of all, as Nate Silver pointed out, the Dow moves in part for reasons that have nothing to do with the broad economy. One of the most notable is the threat of nationalization or bankruptcy. If a company goes bankrupt, it does not necessarily go out of business. In fact, in some cases it may allow it to restructure some of its debt in such a way that it can expand following the bankruptcy. But in a bankruptcy, the shareholders are wiped out. Nationalization is similar. The Dow includes Bank of America, Citigroup, and GM--throw in GE, American Express, and J.P. Morgan if you want. Some combination of nationalization or bankruptcy could send the shares of any of those companies (particularly the first three) to zero, but that doesn't necessarily mean any deterioration of the economy overall; it might even be good under some scenarios. So if Obama had come out and said he would not allow any of those companies to go bankrupt and that he would not structure a deal which would wipe out the shareholders, he would have propped up the Dow. In the absence of such a guarantee, would you buy shares of any of those companies? You might not sell, because you'd hope your company comes through, but without buyers, the price slowly drops. In that sense, the recent drop is, in part, "Obama's fault." But it is not a sign that Wall Street thinks his actions are bad for the economy as a whole. IBM, for example, another Dow member, while it dropped in the October crash, has been pretty steady since then. So that's part of the story. I'll admit that's not the whole story. Companies like Caterpillar and Alcoa seem unlikely to either go bankrupt or be nationalized, but their shares are also dropping. Once again, the drop is pretty gradual--a lack of buyers, rather than a rush to the exits. I'm less confident in my explanation here, but could it be that it's also the uncertainty surrounding the banks that does it? Every day that goes by without clarity on the banks means another day during which big companies don't start new projects, because they want to wait for the dust to settle before committing themselves. And that means another day of lost business for suppliers. Everything sits in limbo waiting for clarity. For that reason, I've been urging clarity, and quickly. But is that necessary? The Obama administration seems to be focused on getting things right--that the markets and the economy can drift lower for another month if it means success in the long run. So they "stress test" the banks before making any decisions on them, and vet each of their treasury nominees very carefully before putting them forward. If that's right, and if they can avoid the economy driving off of a whole new cliff in the mean time (that last one was a doozy), then the Dow will take care of itself in a month or so. We'll know who is going bankrupt, and who is being nationalized: those shares will go to zero, while the others will shoot way up. The industrials like Alcoa and Caterpillar will begin to see will stop feeling the stall, and will stabilize, and perhaps begin a gradual rise again. If that's the plan, and it seem likes it is, then the Obama administration has a lot more courage than I would have had in their place. To use a metaphor which is appropriate here, they are not "spending" political capital, they are investing it, expecting big returns down the road in exchange for the sniping they have to undergo now. (P.S. Full disclosure: I own 100 shares of GE.)
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