So the free world has a new leader.
Barack Obama is the new president of the USA. As an outsider – I appreciate that not all of our US readers will agree – I think this is good news. Whatever Mr Obama’s policies on tax and spending, the US is seen as the home of democracy and capitalism.
In the wake of the credit crunch, a lot of people have been questioning how well our current model of capitalism works, which is fair enough in the circumstances. But we’ve also seen an anti-democratic, authoritarian undercurrent rising – more than a few commentators have vaguely wondered if the Chinese model of authoritarian capitalism would be better – which isn’t a good thing at all.
The election of Mr Obama demonstrates that, whatever else is broken in the US, its democracy works just fine. And instead of constant sniping about the US from European leaders, we can now expect an embarrassing scramble to be photographed next to him.
But enough of all that. What does it mean for investors?
Why this is a bear market rally, not a new bull market
The idea of an ‘Obama bounce’ has been mooted by some commentators, but the truth is that stock markets had already been rallying sharply. In fact, as John Authers puts it in the Financial Times this morning, “in the midst of despair, we are in a bull market.”
Almost all of the major stock markets have already bounced by more than 20% in the past few days, which “satisfies the standard definition of a bull market.” So have we finally seen the bottom? Well, no. As Authers says, all this means is that “the standard definition of a bull market is distinctly lacking.”
The trouble is, they’re bouncing from an incredibly steep fall. The rebound is a ‘bear market rally’. Looking at technical indicators such as the 50-day moving average, Authers points out that the long-running trend is still very much pointing down.
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The rally could of course last for longer. And the fact that we have had a very decisive vote in the US election will help – markets hate uncertainty, and at least some of that has gone now.
However, regardless of how decisive his victory has been, Mr Obama is not a miracle-worker. In fact, with the weight of expectation he’s carrying, he can hardly hope not to disappoint. He’s only a politician after all.
And he’s also facing the toughest economic conditions any new president has seen, arguably since the Depression. As Edward Hadas puts it on BreakingViews.com, “the whole financial system is basically kaput.” Without “trillions of dollars” of government backing, “the whole banking system would likely be out of operation.”
That’s hardly an encouraging set up. Moreover, his options on spending his way out of trouble are limited. “A big trade deficit and large international liabilities make the dollar vulnerable to a run. The country may get away with low overnight interest rates and a $1 trillion federal deficit for a while, but steering policy will be like walking next to a cliff in the fog.”
This means there are a lot of pitfalls ahead. The more euphoric the rally, the greater the disappointment will be when markets realise that this crisis has some way to run. If you’re interested in short-term trading, then there’s every chance that this rally will continue. And it’ll continue across global stock markets, not just the US. But if you’re looking to invest your money for the longer term, I think we’ll see lower lows next year.
We’ll have more on the unenviable mess facing Mr Obama in this week’s issue of MoneyWeek (out on Friday – subscribe to MoneyWeek magazine).
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