Did President Obama’s Speech Cause the Market Decline?

Two things happened at the same time:  President Obama delivered his inaugural address and the stock market declined.

Two things happened at the same time:  The rooster crowed and the sun rose in the East.

This is an enduring logical fallacy.  It endures because of the insatiable human appetite to  impute causality, even when data are lacking.

The Worst of CNBC

Here at "A Dash" we have often endorsed the end-of-day CNBC show hosted by Larry Kudlow.  It generally has a diverse group of guests, and Kudlow acts as the point guard on an NBA team, dishing the ball for effectiveness.

We are therefore disappointed at the shallow analysis of today's trading.  The stock market was weak from the outset because of another around of concerns related to banks, and more pounding by bank analysts.  The decline seemed to be "on hold" during the inauguration, but resumed in late trading.

Larry Kudlow was disappointed that President Obama did not reaffirm his commitment to markets and tax cuts, the Kudlow theme.  His guests agreed that the market had rendered a verdict.  Here is the video, with the key discussion at about 1:15.

Too bad that Kudlow did not make these expectations clear in advance.  Any expert in political science would know that an inaugural address is not going to take on specific policy matters like a State of the Union speech might have.

The point of the speech is to inspire, draw people together, and look ahead.  The Obama speech did all of these things.  We doubt that stock trading had much to do with it.  If it did, it was because of the lack of knowledge of the market pundits.  Sophisticated observers should have known what to expect.

The Obama plan will emerge in good time, and much more rapidly than is the typical case.  If big shots like Kudlow do not understand, that is a better chance for the average investor.

The Best of CNBC

The Maria Bartiromo program's interviews once again reflected the best of CNBC.  She asked some challenging and deft questions to her guests.  In her interview with Richard DeKaser, the award-winning economic forecaster from National City Corp., her expert guest did the two things that we all should emulate:

  1. He looked at current data, and noted the grim prospects;
  2. He looked ahead to the massive government programs in the pipeline.

Regular readers of "A Dash" will note the familiarity of this theme, described at about 40 seconds into the video.  Please watch it all, to see the best CNBC moment out of a long day.  The interview is remarkable both because of the very sensible conclusion — that forecasters are not, and cannot include the impact of policies in the pipeline — but also because he was courageous enough to do take his principled position on a day when the market declined.

Our Take

Once again, the Wall Street pundits and journalists are a bit full of themselves.  This was not a day about the stock market.  Choosing a President involves issues of war and peace, social justice, Supreme Court nominees (and other judges), dealing with crises, allocating resources.  Most importantly it means exercising leadership.

This does not mean following the dictates of any particular interest group.  It means analyzing problems to discover solutions — answers that will work, and will be acceptable to the people.

President Obama was elected because an overwhelming majority of people believe that he can do this.  The punditry makes money — from page views, subscription sales, TV ratings — by selling fear.

Shouldn't we all give the new guy a chance?  At least for a few weeks?

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  • Carol191 January 20, 2009  

    I absolutely am giving “the new guy” a chance, and want him to succeed, but his speech was underwhelming, conventional, with nothing monumental or heart-stirring.
    I don’t watch CNBC, but I came to a similar conclusion. I thought the market was well-positioned to burst up from the pullback levels at midday, and all it needed was the fire of inspiration from our new President. He didn’t deliver, so we all went back to selling selling selling.

  • texalope January 21, 2009  

    I really think that INVESTORS should be focusing on microeconomics not macro.
    Watch how individual businesses are reacting to the recession. Examine their competitive characteristics. Look at their balance sheet. Look at management. Think about what you would do if you owned the entire business. This exercise is easier than the macro issues.
    Individual businesses have the ability to survive and prosper in the next cycle. Many are being sold at bargain basement prices.
    I think the business networks would find some interesting stories if they did the same.
    Simple example. One of my investees is a drybulk shipping company. Yesterday they took delivery of a new ship which is chartered for several years at very profitable rates. This provides predictable cash flow. At the same time they were able to cancel delivery on another ship with a cash and stock deal to the manufacturer. Yet, they retained rights to the ship thru 2009. Both of these moves were IMHO prudent business decisions.
    The firm is selling at .11 book value, .57 P/S, .8 p/cash flow. I plan to make money on this investment but I don’t know when.

  • Russ Wood January 21, 2009  

    I always applaud when folks point out that correlation is not causation. One of our flaws is too see relationships when there is just noise. You cannot remind your readers enough about this danger. I think occaisionally one can point to a specific event or piece of news as being the marginal factor driving market behavior, but only rarely.
    I share your assesment of the purpose of an inauguration speech, but not your opinion. I thought this speech was one of Obama’s weakest (maybe because he usually does so well).
    Like you, I despise the fear sellers. But I see no connection to your concluding call for us all to give the new guy a chance. How can any of us take away his chance? Obama is a big boy and he knew what he was in for (and I’d argue he’s been treated quite kindly overall). More importantly, each of us has certain goals. None of mine changed with the change in administration. I’ll not change my behavior or attitude just so a politician (of any party) can have a chance.

  • Mark Wolfinger January 21, 2009  

    Kudlow is never objective. Never fair-minded. He belongs on FOX News, not CNBC.
    He hates Obama and that’s his bottom line.

  • Adam January 21, 2009  

    i had Bubblevision off almost all day, just to avoid insightful cause and effect analysis like that. What nonsense.

  • DrToast January 21, 2009  

    “If big shots like Kudlow do not understand, that is a better chance for the average investor.”
    Trust me, Kudlow understands just fine. But he’s got an agenda to spread, so he says ridiculous things this.

  • Dividend Stocks January 21, 2009  

    Kudlow lives in his own little world where he thinks he is always right and can’t even hear anyone else talking. I think he thrives on talking over people.
    I thought Obama’s speech was fine and well suited the moment. He wasn’t trying to please every single person out there with his short acceptance speech.

  • Turley Muller January 24, 2009  

    I believe Kudlow knows that inaugural speeches are more poetry and prose, inspiration and vision, than anything real tangible and substantive. The thing is, Kudlow was assuming that the markets and Obama speech were linked, and somehow they traded down due to disappointment of O’s message. The two are separate events. The markets were getting killed because of the UK bank failures and nationalization coupled with awful earnings recently reported from the large US banks, all of which got investors fearful that major financial institutions would have to be nationalized thus wiping out common equity.
    It wasn’t what Obama said. It was what Obama could have said. Kudlow, I think frustrated and nervous about the situation, and knew Obama could calm the markets if he addressed the issue, but he didn’t. No one expected him to, but I guess, Kudlow et al, were thinking O could have stepped in.
    Yet, nothing needed to be done then, for any rhetoric from politicians only have fleeting effects, because only definitive action turns markets, rhetoric merely deflects them. Therefore, until Bills are drafted and passed, no lasting change will come to the market. Of course, markets get ahead of policy, as they are forward looking, so Kudlow just let them anticipate, and hold his horses and ignore the noise and focus on substance. As I said earlier, inaugural addresses are typically replete of substance

  • Jeff Miller January 25, 2009  

    Thanks to everyone for the comments — very much on target. It is nice to have some new participants, including my old colleague and friend Mark Wolfinger.
    It appears that Obama will make a speech before a joint session of Congress next month. This will be more like a State of the Union speech with policy specifics.
    Frankly, I do not expect the punditry to be satisfied by any speeches or proposals, whatever the content.
    Meanwhile, I am starting to “fast-forward” through the nightly Kudlow.