We've all heard it- Obama's bank comments sank the Dow for three straight days, right? That's the popular meme this week, repeated ad infinitum on right wing blogs, Fox News and by a distressing fraction of legitimate news sources.
But is it true? Below the fold we take a quick look at the evidence
The story is everywhere- it was the president's address on new banking regulations that sank the Dow. Take this comment Saturday by the Associated Press:
Stocks retreated Friday for the third straight day on uncertainty about President Barack Obama's plans to restrict big banks and disappointment over companies' earnings report
or the Chicago Tribune:
The stock market sank Friday into its worst three-day slide since the depths of last year's financial crisis, stung by deepening concern about President Barack Obama's bank-regulation plan and fresh doubts about Ben Bernanke's future at the Federal Reserve.
or CNN:
Stocks slumped for a third straight session Friday, on worries that the White House's bank plan and China's lending curbs will mean a broader cutback in lending.
Got that? While it's always difficult to tell exactly what makes the stock market go up or down on any particular day (disappointing earnings reports? Ben Bernanke's future? China's lending curbs?), the media seem to agree that the mean things the president said about banks was the main cause of the Dow sinking for three straight days.
It's obvious really, that it was the president's comments - wait, what?- "three straight days"? But didn't Obama speak about the banks on Thursday? Wasn't Thursday two trading days ago?
We better look at the data. Here's the Dow's recent demise, in all it's glory:
On Tuesday, after the long holiday weekend, things seemed to be looking up- the Dow gained 1% that day, ending at the highest close since October of 2008 (when the Dow was heading in quite the other direction).
At the Wednesday open, the Dow "gapped" down- a term which refers to a significant and sudden change of an opening price or (in this case) index average, reflecting a sudden shift in market dynamics and/or expectations. In fact, that was the second biggest abrupt drop last week, and one which we will come back to. The biggest abrupt drop occurred on Thursday. On that day, between about 10 and 10:30 EST, the Dow suddenly lost around 1%, following the President's televised comments on the banks, which began about 11:30 AM EST.
Whoa. That doesn't seem right, somehow. When were the presidents comments?
Well, let's go to the videotape. The following screen shot comes from a YouTube video capture of a live MSNBC feed.
As you can see, the President's about 11 seconds into his remarks. At the top, MSNBC has the time as 11:37. And if you look closely in the lower right, you can see the Dow at 10,431, down 1.76% from its opening. The rest of the day, after the beginning of his terrible, market-shaking comments, the Dow actually stabilized significantly, losing just 0.24% more.
Look again at the Dow tracing above; see the little black arrow? That's when Obama started talking. To reiterate, the Dow dropped 1.76% before the president began to speak...and 0.24% after. In fact, by the end of his speech, when most of the country (and most average investors) learned about his plans to rein in the banks, the Dow stopped dropping and was flat for the rest of the day. More than anything, Wall Street hates uncertainty, and after the President's specific intentions were made clear, the little panic subsided. (Even if you add in Friday's drop, the market dropped more before Obama's press event last week than after.)
But was Wall Street tipped off before his remarks? Maybe- I honestly don't know if the White House released a transcript before he spoke. And it seems there was widespread speculation beforehand he would propose limits and expectations on the out-of-control financial system:
President Obama will announce today that the administration plans to enact fees on the nation’s largest financial firms in order to recoup the losses expected from TARP.
Oh, sorry. My mistake. That was actually from January 14th, the day Obama announced (again around 11:30) he would levy fees "on the nation's largest financial institutions" to ensure taxpayer money would be paid back. This was a unpleasant surprise to them:
Banking industry representatives have been caught off guard by reports that the Obama administration will propose a fee on large financial institutions designed to recoup any outstanding bailout money
How did the banks, and the Dow, react to that piece of news? Well...they didn't- the Dow closed that day up 0.3%, and went on to set the 15 month high two trading days later. See, the fact of the matter is, there are only two bank stocks out of the 30 that make up the Dow (Bank of America and JP Morgan Chase), and collectively they represent just a little over 4% of that index. As a result, they really have very limited influence on the overall average. To hang the Dow movements on a single minor component is really quite a stretch.
Which brings us to the real question: what did cause the Dow to dive last week? Well, there are certainly plenty of possible culprits, and as I said before, it's really difficult to assign a particular cause, although the financial media always tries to come to a conclusion that makes sense to their combined audience-and-raison d'etre, the financial industry. But again, Wall Street most of all dislikes uncertainty going forward...and personally, if you smooth out the bumps in the tracing above, it seems to me that the decline started off with a bang Wednesday morning, which set a slope for the rest of the week.
Knowing that historically, the Dow has done much better when Dems are in control than Repubs, can anyone think of some headline in Wednesday's morning news that could have started this all off?
UPDATE:
Just to be clear, I am not saying that the decrease in the stock market last week was solely due to Brown's election last Tuesday. I do believe that that event was responsible for the gap down on Wednesday morning, as I think it set a tone of uncertainty, which was exacerbated and continued by other events including some lower-than-hoped-for earnings reports, and especially the doubt over Ben Bernancke's reappointment. Yet the impact of the Brown election was virtually ignored as a possible contributing factor by the media, who settled instead on a meme that Obama's comments about banks were largely responsible for the drop, a conclusion I believe is not supported by the data as presented above.