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Will the world witness an Obama New Deal rally?

Will the world witness an Obama New Deal rally?
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First Published: Sun, Jan 04 2009. 09 34 PM IST

Updated: Sun, Jan 04 2009. 09 34 PM IST
US President-elect Barack Obama’s inauguration on 20 January has been compared with that of Franklin Delano Roosevelt (FDR) in March 1933, during the depths of the Great Depression.
Admittedly, there are many differences between then and now—for instance, unemployment in the US was 25% when FDR became president and the Dow Jones Industrial Average (DJIA), which had been falling for three years, had lost 84% of its value. Nevertheless, like FDR, Obama, too, is preparing a “New Deal”, a massive fiscal stimulus plan designed to bring growth back to the US economy.
How did the market react to FDR’s election? He was declared elected in November 1932 and took office in March 1933. The chart shows that a substantial rally started around his inauguration on 4 March, a rally that took DJIA from around 50 to a peak of 108 on 18 July, a gain of 116% in four months. Thereafter, the index stayed range-bound till April 1935 when it started moving up decisively, going from 100 to almost 200 by the middle of March 1937. It fell after that as the recession of 1937 took hold, probably because policy was tightened too early. World War II intervened and DJIA was able to cross the 200 level only in 1946, a year after the war ended. What’s more, the index was able to cross its peak of 381 reached in 1929, before the Great Crash, only in 1954, after 25 years.
Also See Roosevelt Rally (Graphic)
Will Obama’s New Deal too lead to a rally?
The index has already moved up at least 20% from the depths plumbed in November and the New Year has started with a smart gain for DJIA of at least 250 points. The markets have been ignoring bad news lately, which is generally a sign that a bottom has been made. But these are early days, volumes are light, institutional investors have been on holiday and corporate results for the December quarter are likely to be terrible. On the other hand, there are vast shoals of liquidity locked up in US treasurys that can move out at the first faint glimmer of things getting better.
If history is a guide, we should have an Obama New Deal rally, but the FDR precedent seems to suggest that the recovery will be more long-drawn than is currently anticipated.
Needless to add, an Obama rally in the US will be echoed by markets across the world.
Write to us at marktomarket@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Sun, Jan 04 2009. 09 34 PM IST