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After months of equity-market agony, last week provided a bit of respite. For
the week as a whole, the Standard & Poor’s 500 Index advanced almost 11
Why did markets finally turn around, at least for a while? There were two big
The first was a sign that the efforts of the U.S. Treasury Department and the
Federal Reserve may finally be paying off. Bank of America Corp. and Citigroup
Inc. both announced that they expect to be profitable this year, something that
seemed almost unthinkable a few weeks ago. The light might finally be visible at
the end of the tunnel in the U.S. financial crisis.
The second thing might well have been just as important. The Democrats took a
Since his inauguration, President Barack Obama and his Democratic colleagues
have worked at a feverish pace, announcing countless new policies. In January
they provided a general outline of all of their plans and pushed through a
number of policy changes that were friendly to organized labor and unfriendly to
Early February brought the promise and then the furor over Treasury Secretary
Timothy Geithner’s vacuous plan, the stimulus debate, and the Obama budget,
which was stuffed with big spending, big deficits and tax hikes.
Last week, aside from the signing ceremony for a spending bill that already
passed the House of Representatives in late February, nothing happened.
Washington was quiet, and the world’s financial markets rejoiced. Was it just a
There is a strong theoretical reason to believe it wasn’t.
News and Markets
When markets function well, today’s prices reflect the balance of the odds
that tomorrow will provide good news or bad news. Markets move because news is
better or worse than expected. Against this backdrop, it’s easy to explain the
depressing correlation between Obama’s policy announcements and market calamity.
Prior to the release of his budget, markets were not sure whether Obama would
govern like a moderate or a liberal. The War Against Business evident in his
plans was the kind of news that can move markets.
The good news about Citigroup and Bank of America could easily have been
outweighed by bad news for companies out of Washington. If, for example, the
Democrats had successfully pushed through their so-called card-check
legislation–making it easier for unions to organize America’s workplace without
secret ballots–then the financial markets could well have gone in a different
direction. Quiet was surely preferable to that.
What Moves Stocks
There is interesting empirical precedence as well for the equity market
celebrating silence. It comes from an unlikely place: a famous academic study of
what moves markets, co- authored by Lawrence Summers, now director of Obama’s
National Economic Council.
Back in 1989, Summers and his co-authors, James Poterba of Massachusetts
Institute of Technology and David Cutler of Harvard University, published a
paper in the Journal of Portfolio Management with the provocative title, “What
Moves Stock Prices?” They gathered data on equity-market returns between 1926
and 1985 and identified the 50 biggest stock market movements. Then they set out
to discover what caused the big movements, relying on accounts in The New York
Their data suggest that some big movements, especially declines, were clearly
associated with events. For example, the market dropped 6.62 percent on Sept.
26, 1955, when President Dwight Eisenhower suffered a heart attack, and 5.4
percent on June 26, 1950, at the outbreak of the Korean War. The market dropped
4.61 percent when Harry Truman defeated Thomas Dewey.
But for most of the big movement days, the news seemed relatively light, even
nonexistent. The authors wrote: “On most of the sizable returns days, however,
the information that the press cites as the cause of the market move is not
That is especially true for the days when the market advanced. The newspapers
often failed to find any explanation at all for good days. When stocks surged
5.02 percent on May 27, 1970, the Times wrote that it happened “for no
fundamental reason.” On June 29, 1962, according to the Times, “stock prices
advanced strongly chiefly because they had gone down so long and so far that a
rally was due.”
Silence may be golden because policy makers on average mess things up. There
is even a mutual fund that is set up to profit from this observation. According
to the Web site for the Congressional Effect Fund, between 1965 and 2008 the
S&P 500 Index increased at an annual rate of about 16 percent during periods
when Congress was out of session, and increased only 0.31 percent when Congress
was in session.
Benefiting From Inaction
From January 2000, this contrast is even more striking. The S&P 500
gained more than 8 percent on days when Congress was out of session and declined
by more than 12 percent on the days when Congress was in session. Even this
year, if you only put your money in the market on days when Congress was out of
session, you would have suffered losses of 4 percent, outperforming the S&P
500 by roughly 12 percent.
The political vacation was informal this week. If President Obama really
wants things to get better, he should take the rest of the year off.
Kevin A. Hassett is a senior fellow and the director of economic policy
studies at AEI.
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