So much for hope trumping fear—in the markets. As President Barack Obama marched up Pennsylvania Avenue, the financial markets reverted to type. The Dow Jones Industrial Average posted its worst inauguration day performance since it was created by old-man Dow. This underscores the challenge Obama faces in righting the US financial system.
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Not that the decline in the stock market was Obama’s fault. The passing of the torch from the Bush era went off without a hitch. And Obama’s speech struck the right tone for investors. To paraphrase, he told the American people that they need to make sacrifices, but nothing like those of their forefathers. Now get back to work.
For investors, getting back to work unfortunately meant a return to the past few months’ hellacious behaviour. The Dow closed at 7,949, just shy of its late November low. As usual, it was the financial sector leading the decline. With good reason.
Over the weekend, the UK was forced to dig back into its increasingly threadbare pockets to prop up the banking system. The Monday US holiday meant US bank shares played catch-up today.
But to say the Obama handover had nothing to do with the return of fear to finance might be inaccurate. Over the weekend, two of the President’s right-hand men—council of economic advisers head Lawrence Summers and top strategy director David Axelrod—made clear they will make changes to force the banks that the government is propping up to lend more money to get the economy moving again. While a worthy goal, their comments hinted at a new level of government diktat in the functioning of the banks that rightly scares investors. To nurse the financial system—and indeed the economy—back to health, Obama and his men will need to manage this conflict between the interests of shareholders and government with greater aplomb, or this inaugural decline in stocks will merely be a foretaste of the pain to come.