Some very unpleasant things have happened in the markets since Obama won the election. Equities are down about 20% and gold prices are up over 30%. That has to be the most devastating rejection of a new president's policies by any market in recent memory. Investors are voting with their feet, running away from equity risk and into the comforting arms of gold. Come to think of it, since Obama's chances of winning the election started to rise meaningfully by the end of September, when the S&P 500 was trading around 1200, we could say the Obama presidency has cut equity values by fully one-third.
Those who voted for Obama would argue that he hasn't done anything yet, but the economy has collapsed and it is therefore the growing threat of a global depression that is responsible for the decline in equity values and the soaring price of gold. Things will get better once the spending bill starts to kick in.
At this point everyone is entitled to their opinion, since no one can know precisely what is driving the market, but I think the market is forward-looking and has decided that the "stimulus" bill is not going to be stimulative at all. Furthermore, I take the view that the bill that Obama will be signing today represents the sum of all the market's fears about an Obama presidency: e.g., bigger government, more income redistribution, more regulation, universal healthcare, subsidies for expensive energy sources, price fixing, abrogation of contracts, salary caps, industrial policy, protectionism, etc. There's enough hostility to capital and free markets in this bill to make any market and any rational investor deeply depressed.
A good friend, Eileen Leech, offers a somewhat less partisan view of the mess we're in: "maybe the new socialism didn't cause all of the hole we're stuck in, but it has definitely taken away the ladder."
There's a lot of wisdom in that metaphor. Bad policies and more government spending don't necessarily mean the current recession will turn into a depression, but they do mean that the economy will most likely grow by less than it otherwise could in the future. (For example, Brian Wesbury talks here about how every extra percentage point of government spending reduces potential GDP growth by 0.2%.)
In any event, the question for investors is not who or what caused the mess, but whether all the bad news is fully priced in or not. I still think it is.
I have been highlighting for the past few months a number of indicators that show definite (and in many cases huge) improvement over the past few months: the rise in the Baltic shipping index, higher prices for most commodities, lower swap and credit spreads, lower implied volatility, a declining TED spread, rising T-bill yields, rising TIPS spreads, rising Chinese and Brazilian equity markets, coordinated and aggressive central bank easing, and rising home sales. If we've seen most of the bad news and are nearing the bottom of the recession, as these indicators suggest, even awful policies should not prevent some recovery in equity values. I think the market is still fearful that we're on the brink of a deep global depression, so if the reality falls short of a true nightmare, it will be good news.