Obama Rally Won’t Last While Jobs, Spending Wane: John F. Wasik
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Commentary by John F. Wasik
May 11 (Bloomberg) -- We have just had a stock rally that is linked to U.S. President Barack Obama’s first 100 days.
It was a decent sprint, but I don’t think it has legs.
The Standard & Poor’s 500 Index managed to rebound from its dismal showing in 2008. If you measure the index from Obama’s inauguration on Jan. 20 through April 30, the benchmark gained 10 percent with dividends reinvested.
If you stayed in the market all of last year, though, you still have some ground to make up after losing 40 percent during one of the worst years for stocks since the Great Depression. So the Obama rally is still a pyrrhic victory so far.
The same can be said in emerging stock markets, which lost more than half of their value last year. They have risen 34 percent in Obama’s first 100 days -- as measured by the iShares MSCI Emerging Markets Index exchange-traded fund.
At the start of Franklin Delano Roosevelt’s first term as president, U.S. stocks surged more than 50 percent, while the economy improved only slightly. Obama may also be benefiting from a “honeymoon effect” or what economist John Maynard Keynes called “animal spirits.”
Bonds haven’t fared quite as well under Obama. The Vanguard Total Bond Market ETF, which was up about 7 percent last year, was off almost 1 percent during the Obama period.
Another lackluster asset class is commodity funds, which also lost about half their value last year. They are down about 1 percent during the period, if you track the returns of the Goldman Sachs Commodity Strategy Fund.
Known ‘Unknowns’
The Obama rally was fueled by optimism that most of the largest U.S. banks won’t collapse. The market may believe that the “unknowns” of their balance sheets are now known.
A handful of patients may pull through while the rest of the U.S. economy at large, reeling from diminished consumer spending and high unemployment, still has a fever. Even though payrolls fell less than expected -- by 539,000 -- in March, the U.S. labor market is projected to remain weak for months.
Those losing -- or afraid of losing -- their jobs reel in their spending. A Bloomberg survey of economists forecast that spending will drop 0.1 percent this year. For the American economy, that’s not encouraging news.
Let’s say stocks are due for another tumble. Will bonds provide the safe haven they did last year?
Deflation -- a general decline in price levels -- is ruling the day during a massive deleveraging going on from Main Street to Wall Street.
Three Bubbles
You can’t forget that three burst bubbles have blistered stock returns to such an extent that investors in 20-year U.S. Treasuries beat the S&P 500 from 1979 through 2008, says Robert Arnott of Research Affiliates in Pasadena, California.
While stock routs generally favor fixed-income investors, risks still loom.
Bond prices may plummet after Western governments have to fully finance all the debt they need to sell for their economic stimulus packages. The Obama administration’s recently announced $3.4 trillion budget alone will balloon the federal deficit to a projected $1.7 trillion.
Inflation may come back to ravage debtor countries then. So make sure you protect your bond holdings through inflation- protected securities and commodity funds.
In judging current events, separate politics and recent returns from what you need to do.
Risk Appetite
Find out how much you will need to comfortably live on and see if you are saving enough. Understand and measure the kinds of risk you are facing with each kind of asset. How much can you lose? A lot of people didn’t ask that question in 2008.
Don’t be nationalistic when it comes to your stock allocations, either. Growth will probably come from places you have never been and don’t understand.
You may even want to cut down on your U.S. stock holdings by investing in a global portfolio such as the Vanguard FTSE All-World EX-US Index ETF that samples non-U.S. equity returns.
Most of all, forget recent returns and spread your money between bonds, stocks, commodities, real estate, Treasury- Inflation Protected Securities and cash.
And never forget to eschew investing decisions according to political polls and current stock-market returns. Those red herrings have the shelf life of all other fish.
(John F. Wasik, author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.
Last Updated: May 11, 2009 00:00 EDT
