Contrasting Change

As the market continues it falls back to levels not seen since the late 1990s, an often overlooked fact is that markets are forward looking indicators. They are not so much an indicator of how bad things have been, or even how bad things are. Markets are an indicator of what traders as a collective whole think the future will bring.

For example, by the time Clinton took office in 1993, the recession following the first gulf war was over and the economy was growing at a healthy 4% through all of 1992, which might strike some as odd, for Clinton campaigned at the time on how this was the worst economy in 50 years. The markets were positive during Clinton’s first year continuing a moderate growth that had started in Feb 1991 in the 2900s rising to the 3900s by the end of 1993

By then the effects of the Clinton tax increases and his “Stimulus package” were becoming clear, at least to those that read the economic tea leaves. The market spent 1994 up and down, but mostly down. In Late November it was down below 3700. By the end of the year it was clear that the economy was slowing and in fact the first two quarters of 1995 show the growth in GDP dropped to 1.1% and 0.7% respectively. Yet despite this the stock market started to grow. Not only did it grow, it started growing much faster than it has from 1991-1993. Markets were beginning to see the economic expansion that marked the late 1990s and they wanted in.

What changed in late 1994 that markets were reacting to? In November 1994 Republicans won control of Congress for the first time in over 40 years . Between the Contract with America and the promise of tax cuts, the markets were betting on strong growth in the economy, a bet that paid off.

Today we face serious economic problems. The markets topped out at over 14000 in October 2007. A year later the market had slipped to under 11,000 when the financial crisis broke and the markets plunged to below 8500, recovering to 9500 by election day. Unlike what happened in late 1994 and early 1995 as the Republicans laid out there programs, as Obama has laid out his economic plans, and passed his stimulus package, the markets have had a vastly different reaction.

Whereas following the election of the Republican Congress the markets began to price in future profits, as Obama is rolling out his economic program, the markets are pricing in future losses. Obama promised us change we could count on. We may be able to count on it, but the markets don’t seem to want to bet on it.