Navigating OBAMArkets

By: Prieur du Plessis | Thu, Nov 6, 2008
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The stock market yesterday did not offer President-elect Barrack Obama as warm a welcome as he would have liked. According to Bespoke, the Dow Jones Industrial Index's decline of 5.1% was its worst post Presidential election day decline in history. As shown in the table below, yesterday was only the fourth time the Dow has ever lost more than 1% the day after a Presidential election (gray-shaded areas). "Coincidentally, all three previous periods occurred during the Great Depression as well as after an election that gave complete control to one political party," said Bespoke.

The table also highlights how the Dow fared for the rest of the year. Unfortunately for the bulls, in each previous period the Dow had negative returns for an average loss of 2.1%.

But is will be incorrect to necessarily ascribe the stock market's decline to the election of Mr Obama, especially not knowing the detail of his agenda. In my opinion is was rather as a result of investors focusing anew on the dismal economic situation the new President will be inheriting. The message of recession-like conditions was yesterday confirmed by the worse-than-expected ISM Non-manufacturing Survey (down from 50.2 to 44.4).

Looking longer term, a BBC report refers to a 2006 study by Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, which shows that from 1948 to 2006 stock market returns averaged 15.3% a year under Democratic administrations, and just 9.5% a year under the Republicans. Also, a recent study published in the New York Times showed that $10,000 invested in the S&P 500 Index in 1929 would have grown to $11,733 if invested under Republican presidents, but to $300,671 under Democratic presidents.

The tag cloud - a way of visualizing word frequencies at a glance - of the text of Obama's acceptance speech makes for interesting reading. Strikingly, the most widely-used word was "promise" (32 times)!

While urgent challenges will face Mr Obama at the onset of his presidency, it remains difficult, in an environment of economic and profit recession, to read the stock market's direction and make a call on whether a secular low has been reached. At least, frantic actions by central banks, governments and the IMF to fend off a total economic collapse, as well as gradually improving credit market conditions as seen from the TED spread declining by 211 basis points since the middle of October, are positive signs that we could be in a broad bottom area of this bear market. Shorter term, it is crucial for the recent lows (8,176 on the Dow Jones Industrial Index and 849 on the S&P 500 Index) to hold.

The last word goes to John Hussman (Hussman Funds) "It is impossible to be a successful equity investor without the willingness to accept some amount of market risk when conditions appear frightening. If anything should be clear from the bubbles of recent years, the greatest risks are not when prices are depressed, the economy is weak, and investors are frightened, but rather when prices are elevated and an unendingly positive outlook for technology, or housing, or global growth, or private equity, or emerging markets, or commodities seems all but certain."

Related posts:
The challenges facing Obama
Sorry Obama, Wall Street doesn't care

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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