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As a market pundit, the US President is looking pretty good

As a market pundit, the US President is looking pretty good
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First Published: Mon, Apr 06 2009. 10 42 PM IST

Market potential: A 4 April photo of US President Barack Obama. He said the market fluctuates daily. If you spend all your time worrying about that, you’re probably going to get the long-term strategy
Market potential: A 4 April photo of US President Barack Obama. He said the market fluctuates daily. If you spend all your time worrying about that, you’re probably going to get the long-term strategy
Updated: Mon, Apr 06 2009. 10 42 PM IST
In a 3 March press conference, US President Barack Obama suggested that now is a good time to buy stocks.
Market potential: A 4 April photo of US President Barack Obama. He said the market fluctuates daily. If you spend all your time worrying about that, you’re probably going to get the long-term strategy wrong. Michael Dalder / Reuters
In the President’s words, profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.
He added that the market bobs up and down day to day. And if you spend all your time worrying about that, you’re probably going to get the long-term strategy wrong.
So far, as a market pundit, the President is looking pretty good. A rally began on 10 March, carrying the Standard and Poor’s 500 Index up 20% from where it was the day of that press conference, and more than 23% from the 9 March low.
I don’t think Obama particularly cares about a one-month time frame, though. I think his time horizon was more like three-five years.
And on that basis, I think he will be proven right. I believe the Dow Jones Industrial Average, now at 8,018, will probably reach 9,000 this year, and 12,000 before Obama finishes his first term.
Almost certainly, the market will have ups and downs as the country works its way through a nasty recession, deals with the troubled housing and auto markets and tries to repair a damaged banking system. But by declining 55% from 10 October 2007, through 9 March 2009, the market already anticipated those troubles.
The current recession is longer and deeper than most, and may prove to be the worst since World War II. That doesn’t mean it’s fated to be a replay of the 1930s.
Obama may have slightly mishandled Wall Street lingo when he referred to profit and earning ratios. I’m pretty sure he meant price-earnings ratios. But he was right when he said the ratios have reached attractive levels. The Standard and Poor’s 500 Index trades at 12 times earnings now, well below its normal level of about 15.
Those who foresee more woes for the stock market point out that the S&P trades for about 12 times the average earnings for the past 10 years. At previous market troughs, they note, that multiple got as low as seven.
That’s true, and stocks could, indeed, go lower. I believe, though, that people who follow Obama’s advice will be glad they did in about five years.
My thought is similar to the one expressed by billionaire investor Warren Buffett in an op-ed piece in the The New York Times last October. He wrote that he didn’t have the faintest idea whether stock prices would be higher or lower in a month—or a year. But he said he’s buying American stocks aggressively, and predicted most major companies will be setting new profit records five, 10 and 20 years from now.
Obama is far from the first US President to attempt to jawbone the market. In May 1970, for example, Richard Nixon said, “Frankly, if I had any money, I’d be buying stocks right now.”
The president who most resembled Obama, in my opinion, was John F. Kennedy—a young and charismatic Democrat who faced a recession and a bear market. Kennedy was lucky compared with Obama, in that his recession and bear market were less severe than the current ones.
In June 1962 Kennedy lamented that his opponents, including many business leaders, blamed any and all turns of the speculative wheel on lack of confidence in his administration.
Just as Obama recently called in banking leaders, Kennedy met the chief executives of the nation’s steel companies to pressure them to roll back an increase in the price of steel.
Obama also took a page from Kennedy’s playbook in using a tax cut as a tool for jolting a stalled economy. On both occasions, the tactic was controversial. It worked for Kennedy. Economic growth, near zero when he took office in January 1961, rose to more than 5% during most of his term. I suspect it will work fairly well for Obama.
One president who comes in for a lot of criticism is Herbert Hoover. He was president when the stock market crashed in 1929. In the public mind, Hoover is often associated with inaction in the face of crisis.
Hoover made a lot of mistakes, in hindsight, but he wasn’t inactive. A month after the stock market crashed, he summoned leading industrialists, including Henry Ford, to Washington.
Hoover appealed to them not to cut wages, and won a promise of cooperation. Ford even agreed to raise wages for his auto workers to $7 (Rs350) an hour from $6.
Hoover also ordered a speed-up of federal construction projects to try to reinvigorate the economy, and appealed to governors in all 48 states to do the same. In addition, he, too, engineered a tax cut—though in retrospect his $160 million tax cut was too small to help.
Lyndon Johnson boasted, both in campaign speeches and privately, about the increase in the stock market while he was in office. I think that by the time he leaves office, Barack Obama will be able to do the same.
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First Published: Mon, Apr 06 2009. 10 42 PM IST