Investment professionals and econo-pundits claiming to speak for Wall Street have been blaming President Obama for the recent run of losses in the stock market. In their view, investors around the world are giving a daily thumbs-up or thumbs-down to the administration's manifold policy initiatives. "Obama's Radicalism is Killing the Dow," read the headline of a Wall Street Journal op-ed by Stanford economist Michael Boskin, a former official of the first Bush administration.
On March 3, Strategas analyst Dan Clifton noted that "with the S&P 500 off close to 8.5 percent since the budget was introduced, it is clear that equity investors remain skeptical of the government's plan to lead us out of this financial crisis." Even CNBC's James Cramer, who supported Obama during the presidential campaign, has turned on the president, calling him a "wealth destroyer."
Talk about misplaced anger. Wall Street built a wooden house, stuffed it with flammable material, set it on fire, and then poured gasoline on the blaze. And now it's blaming the inferno on the arson inspector, who wasn't appointed until after the fire had reached three-alarm status?
Alas, the investor in chief is taking notice. In early March, he made a tentative stab at bucking up the markets. "What you're now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal, if you've got a long-term perspective on it." (Maybe if this whole Leader of the Free World thing doesn't work out, he can get a gig on CNBC.) But Obama's commendable tendency to engage his critics is misguided in this case. He should be ignoring the Dow. The index has fallen about 50 percent from its closing peak of 14,164 on Oct. 9, 2007. (That was the week the Fox Business Channel debuted. Coincidence? I report, you decide.) Everything about the markets has been chopped in half—their value, their moral authority, and hence their claim on Washington's attention. Having deprived Americans of so much of their wealth, the market is today like Rush Limbaugh: an unpopular loudmouth prone to emotional outbursts.
When Obama compared the Dow to a "tracking poll in politics" he made an error commonly seen in the Washington-Wall Street corridor. Securities markets are decidedly not public opinion polls. In the fall of 2007, when the Dow was at its peak, only 25 percent of Americans thought the country was on the right track, according to the NBC/Wall Street Journal poll. And since Obama's election, the right-track number has exploded to the upside, from 11 percent in early November to 41 percent this month—even as the markets plunged. Besides, markets aren't partisan. They don't like one president and dislike another. Proponents of the Obama bear-market thesis tend to leave out the inconvenient fact that this horrific bout of wealth destruction started in October 2007 and had completed most of its rampage when a president whose name is no longer spoken—it rhymes with "smush"—was in control. And when the market rallies, as it did early last week, folks like Boskin and Clifton don't declare that the market has suddenly endorsed the latest fiscal plans. "I don't believe that people sit home and watch [Treasury Secretary] Tim Geithner speak and change their confidence views," said pollster Scott Rasmussen, who tallies a daily investor confidence index. In recent weeks, he notes, Republican investors have become more pessimistic while Democratic investors have become less pessimistic.
Above all, though, I'd dispute the very notion that the market "thinks" anything coherent at all. The market is made up of all types of participants: rational, irrational, some focused on the past, some on the future, some obsessed with Washington, others with China. In October 2007, with the Dow at 14,000, did the market "know" a recession was about to start and that a financial tsunami was about to hit? Um, no. Of course, over time the market does respond to fundamentals like earnings and dividend payments. But in the past half-dozen months, the fundamentals have been fundamentally unsound. The S&P 500 could be at around 700 because Obama is a Commie who wants to destroy free enterprise. Or it could be at around 700 because that's roughly 15 times the index's estimated operating earnings per share.
Even if the Dow and S&P 500 were dispassionate, rational, and shrewd, we'd still err in regarding them as gauges of the American economy. Their constituents are in fact citizens of the world who happen to be domiciled in the United States. In 2007, the typical Standard & Poor's 500 member that broke out foreign sales reported that 45.8 percent of its revenues came from outside the United States. For many of the 30 components of the Dow, the percentages are much higher, according to Compustat: General Electric (54.3 percent), Caterpillar (66 percent), Intel (85.6 percent). Last week, IMF Managing Director Dominique Strauss-Kahn said he expects the global economy to shrink for the first time since the 1940s. It's no surprise that stocks with the greatest exposure to the global economy have been getting whacked.
Some critics have charged that Obama is trying to do too much at once. If he's looking for items to remove from his daily to-do list, he could start with: "Check on what markets are thinking."
A version of this article appears in this week's Newsweek.