Worst Market Since Reagan Greets Obama Before Election
With only six months before the election, the stock market is giving President Barack Obama the worst returns since Ronald Reagan was seeking a second term.
The Standard & Poor’s 500 Index (SPX) is up 1.3 percent since Mitt Romney’s campaign began 12 months ago, compared with average gains of 12 percent for incumbents who won re-election starting with Harry S. Truman, according to data compiled by Bloomberg. Stocks are also advancing less than the 7 percent minimum enjoyed by George H.W. Bush, Jimmy Carter and Gerald Ford, who lost their bids for a second term. The only one with a worse equity performance heading into the vote was Reagan.
Weakening equity markets after a three-year rally underscore the challenge faced by Obama, who took office during the worst recession in seven decades and has presided over 11 quarters of growth. While share returns do little to foretell presidential contests, the 8.7 percent decline in the S&P 500 since April 2 may be a sign investors are losing confidence in an accelerating recovery even as they anticipate more central bank spending to stimulate the economy.
“Fiscal policy is maxed out,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a telephone interview on May 16. His firm oversees $643.3 billion. “In past years, we actually had the budget to be able to do it. We had the economic growth that generated tax revenues to be able to support any kind of fiscal policy. There was a lot more flexibility in enacting fiscal policy in prior years.”
Stocks fell for a third week, pushing the benchmark gauge for U.S. equities down 4.3 percent to 1,295.22 and the MSCI All- Country World Index (MXWD) to its worst week since September. Concern grew that Greece will leave the euro even as European Central Bank President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area. About $4.5 trillion has been erased from global equity values this month.
The S&P 500 advanced 1.6 percent to 1,315.99 today, while the MSCI index climbed 1.1 percent to 301.33. Both rallied after dropping six straight sessions.
Speculation about Obama’s fortunes has fluctuated with the stock market. Since the S&P 500 reached a one-year low of 1,099.23 on Oct. 3, odds he will win in November have climbed as high as 61.4 percent from 46.5 percent as the index gained almost 30 percent, data compiled by Dublin-based bookmaker Intrade show. They’ve slipped back to about 57 percent.
Reagan’s First Term
U.S. stocks declined in the 12 months through May 1984 during Ronald Reagan’s first term, as U.S. Federal Reserve Chairman Paul Volcker pushed his target for overnight loans between banks to 10.5 percent from 8.5 percent at the start of 1983. The S&P 500 advanced 5.7 percent from then through Nov. 2, compared with the 4.6 percent average return in the six months before elections since 1932, according to data compiled by Bloomberg.
The S&P 500 plunged 25 percent in the two weeks following Obama’s Nov. 4 election. It was the fastest decline since the October 1987 stock market crash and extended the index’s 19 percent plunge following the collapse of Lehman Brothers Holdings Inc. two months before. By March 2009, the S&P 500 had lost 57 percent from its record in October 2007.
The 80 percent advance in the 14 months ending April 2010 represented the biggest gain for any president since Franklin D. Roosevelt in 1934, when the index advanced 85 percent, according to data compiled by Bloomberg. Retailers, media companies and technology shares led the gains, with CBS Corp., Priceline.com Inc. and Apple Inc. (AAPL) increasing at least sixfold.
The rally faltered in 2010 and in 2011 as investors speculated a recession was imminent and bet equities would suffer as politicians failed to solve the U.S. budget crisis. The Fed’s signals of more easing helped equities rebound.
Obama’s 1.3 percent return since May 2011 comes after the S&P 500 posted its best first-quarter gain since 1998. Shares have fallen 8 percent since the end of March, on pace for the worst second quarter in an election year since Truman, according to data compiled by Bloomberg.
The Fed cut rates to near zero a month after Obama was elected in November 2008 and has pledged to hold them their through 2014, the longest period without an increase on record. The world’s largest economy has expanded 2.4 percent per quarter on average since the recession ended in June 2009, the weakest recovery in six decades, data compiled by Bloomberg show.
The Fed has carried out two rounds of bond purchases known as quantitative easing aimed at spurring inflation, buying $2.3 trillion from 2008 to 2011. Policy makers said at an April meeting that the central bank would continue its swap of $400 billion of short-term debt with long-term debt to lengthen the average maturity of its holdings, a move dubbed Operation Twist. The Fed is scheduled to complete the program at the end of June.
“Bernanke’s been driving the bus for four years,” said Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees $370 billion, in a phone interview on May 16.
“The reason Bernanke has been so aggressive on the monetary policy side as he’s been is because he realizes we’re not getting the stimulus on the fiscal side,” said Orlando, who added that he doesn’t expect a third round of easing. “Bernanke took it upon himself to do more to help the economy along.”
Bill Gross, co-chief investment officer for Pacific Investment Management Co., and Jan Hatzius, the chief economist at Goldman Sachs Group Inc., said this month that investors should prepare for more bond purchases by the Fed. Several policy makers said in April a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery on track, according to meeting minutes.
The S&P 500 rallied 30 percent in the eight months after Bernanke foreshadowed in August 2010 a plan to buy $600 billion in bonds. Energy, material and industrial companies led the gains, as investors bought stocks most tied to economic growth, betting the stimulus would boost production. Tesoro Corp. (TSO), a San Antonio, Texas-based oil refiner, surged 149 percent from Aug. 26, 2010, through April 2011 for the biggest gain in the S&P 500 during that period. National Oilwell Varco Inc. (NOV) and Baker Hughes Inc. (BHI) both more than doubled.
About 52 percent of investors in government-backed mortgage bonds, the likely focus of additional Fed debt buying, expect more easing within the next six months, according to a survey in the first week of this month by JPMorgan Chase & Co. analysts.
Inability to Spend
Obama’s inability to spend more to drive growth may limit stock gains before the election, according to Rebecca Patterson, the New York-based chief market strategist at JPMorgan Asset Management, which oversees $1.3 trillion. JPMorgan research shows that the most consistent fiscal stimulus relative to gross domestic product occurred in the third year of a presidency during the last eight election cycles.
“Historically, incumbent presidents would lean towards more fiscal stimulus in the year before an election to have a strong economic backdrop for the election year,” she said in a telephone interview on May 16. “Given the U.S. deficit, President Obama has been much more limited in this respect.”
Romney, the former Massachusetts governor, attacked Obama last week for the swelling U.S. deficits, saying the president has done “almost nothing to fix” debt amassed over eight years by former President George W. Bush. Romney plans to streamline agencies and lower federal spending to 20 percent of gross domestic product from 24.3 percent to spur economic growth.
Obama is pushing income tax credits for small businesses and would face spending decisions at the end of this year. Income tax cuts first enacted under President George W. Bush will expire, as will a temporary reduction in the Social Security payroll tax.
The yearly government spending gap reached $454.8 billion before Bush left office in January 2009. Under Obama, the deficit rose to $1.42 trillion at the end of his first year, and is projected by the Congressional Budget Office to be $977 billion in fiscal 2013.
Those concerns haven’t kept the bond market from rallying, with yields on 10-year Treasury notes falling to 1.69 percent on May 17 from this year’s high of 2.40 percent two months ago, according to Bloomberg Bond Trader data. The yield is 9 basis points, or 0.09 percentage point, above the record low and rates are a quarter of the 50-year average of about 6.70 percent. Yields on securities that protect against a rise in consumer prices show diminished concern about inflation.
Last year’s stalemate between congressional Republicans and Obama led to a downgrade of the U.S.’s AAA credit rating by S&P in early August. The S&P 500 fell the most in three years during the period, losing 19 percent between April and October before rebounding.
“Volatility in this election cycle is going to be extreme because you have really two diametrically opposed candidates on fiscal issues,” said Tim Hoyle, the director of research at Radnor, Pennsylvania-based Haverford Trust Co., which manages $6 billion.
In 2008, “you had two candidates who were in different ways arguing for stimulus and to get the economy back on track,” he said. “This time around, the president’s getting dealt such a short hand.”
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