For the most part, markets appear suspicious of change. When another candidate swept into the Oval Office nearly 30 years ago bringing a message of change and hope, the markets faded 2% to 950.68. The three-month bill yielded 16% and unemployment stood at about 7.5%. Yet the nation embraced Ronald Reagan as a ray of hope. It was morning in America again.
President Barack Obama may want to take note that Reagan’s path was far from smooth. His presidency ushered in a multi-decade bull market. But one year after he had taken the oath of office, Reagan presided over a weakened economy: The Dow dropped nearly 13% in his first 365 days office and interest rates inched higher.
The markets also sank on Inaugural Days for former Jimmy Carter, the first Clinton administration, and George W. Nonetheless, it’s still surprising that Obama’s much-anticipated arrival on Pennsylvania Avenue didn’t overcome market jitters.
Unfortunately, this is bound to be a year of unpleasant surprises and Obama doesn’t seem to have anyone with the stature of former Fed Chairman Paul Volcker standing behind him to help guide the economy to a smooth landing. Fed Chairman Bernancke and Tim Geithner, the nominee for Secretary of Treasury, have generated enough controversy to eliminate them from a Volcker-like role. And, besides, this country is wary of over-venerating Fed chairmen, to wit, Alan Greenspan.
The years of easy credit have spawned one hard landing. Who could ever believe that the Dow Jones Industrial Average would include components that trade in the single digits? GM sank today to $3.55, down from a 52-week high of $29.28; Citigroup slide to $2.91, down from its high of $29.73; and Bank of America slide to $5.24, a sliver of its 52-week peak of $45.08. These are days of unimaginable numbers from the ballooning losses and shrinking balance sheets to almost-not-there stock prices.
Economist Dan Ariely postulated in an NPR interview that Obama is so popular because no one is quite sure what he is going to do. With Reagan, everyone had a very clear idea of his philosophy and he would implement it. Reagan more or less retained his popularity because he basically hued to his crede — although the budget deficit he built was quite unexpected. Ariely warns that as the nation comes to know Obama better the relationship could grow rockier. Online dating goes well at first, but then when the people meet, the romance often quickly ends.
The markets had plenty of reason to drop today: The news from the banking sector is dreadful. And without a healthy banking sector, the economy will have a very hard time recovering. But I wonder if the markets didn’t tumble a little harder than I would have expected for another reason: As awestruck as so many are with Obama, no one is quite sure what he plans to do. Today, the Wall Street Journal called it “The Opacity of Hope.” President Obama is articulate, smart, and focused. His goals are lofty. But how he hopes to lead remains unclear. We all wish him much luck. But he should also be on notice: The markets won’t be cutting him any slack. Tuesday’s drop was the biggest ever on an Inauguration Day.