Stock market

It was neither a surprise nor a disappointment that the stock market fell yesterday as it reacted to Treasury Secretary Geithner's latest bailout announcement.  Stock prices reflect the value of expected future profits -- cash flows after all vendors and creditors have been repaid.  If the government had stepped in with (yet) another (even more absurdly generous) plan to relieve shareholders of their obligations to those creditors at taxpayer expense, then naturally stock prices would rally.  So we an at least be thankful that we didn't see that. 

For a more colorful take on these ideas, here is Steven Pearlstein in The Washington Post:

Not enough clarity, they complained. Still no light at the end of the tunnel, bemoaned others. Like spoiled, petulant children, they demonstrated their dissatisfaction by driving stock prices down another 5 percent.

Economists have done a lot of research on how U.S. presidential elections affect the stock market.  Most of the studies show quite an advantage for equities following the election of Democrats, but a Federal Reserve study concludes there is no consistent relationship if you correct for market volatility and test back to 1852. 

The most cited paper was published in the Journal of Finance in October, 2003 by two University of California economists, Pedro Santa-Clara and Rossen Valkanov.  They found 9% higher stock market gains for large stocks in Democratic administrations since 1928. 

However, Santa-Clara and Valkanov did not correct for swings in market volatility or examine periods before the Depression, when market volatility was lower. In a 2004 paper, two Federal Reserve economists, Sean Campbell and Canlin Li, made those corrections and found that the 9% higher return dropped to 4%.  They concluded that market returns don't track with which party wins presidential elections.

Yesterday saw pure market panic in the morning followed by euphoria in the afternoon when word leaked out on CNBC TV that Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke would meet with Congressional leaders of both parties at 7 p.m. last night.

You would never guess what actually happened in the meeting from the positive statements made afterward around 8:20 p.m.  No plan was presented other than in the most general terms to have the federal government acquire distressed assets of financial institutions.  No cost estimate was presented.  When pressed, Paulson and Bernanke said "hundreds of billions."  When asked how many hundreds of billions, they just repeated themselves, "hundreds of billions."

It's not every day that the stock market plunges 4.71% on the S&P 500, as it did today, but government responses uniformly tend towards calming words.  This collection of headlines from late October, 1929 makes my point -- we tend to be too optimistic in our assessments of future events.  We shouldn't shy away from the difficulties we face. 

My concern is not the short-run economic or market downturn.  We're getting through that fairly well.  My concern is that when the bills come due for these bailouts -- say at least hundreds of billions or just over a trillion dollars -- we Boomers won't shoulder our share of the load, and our children will pay them.

"Q.  ...explain to the American people how did we get here.

I'm a big CNBC fan. I've been interviewed countless times since the network was formed, know many of the reporters and producers well, and most important, watch it religiously all day long when the markets are open.

But I've never understood why CNBC and virtually everyone else in the financial media continues to think it's important when the Dow Jones Industrials average exceeds its previous record high by a few points or why GOP-leaning analysts say that it's significant.