With the stock market hitting new highs, some people have already forgotten about the Great Recession. If you recall 2009, things looked pretty bleak economically. But the outlook has changed dramatically in just 4 years. And it has been a boon for investors, as even the safest indices have yielded a 250% return (>25% annualized compound return:)
Meanwhile, trends have reversed direction with unemployment falling, and consumer confidence rising:
Since this coincides with President Obama’s first term, I asked the authors of “Bulls, Bears and the Ballot Box,” (available on Amazon.com) which I reviewed in my October 11, 2012 column, to capture their opinions on how much Americans should attribute the equity upturn, and improved economic prospects, to the President as we enter his second term.
Interview with Bob
Deitrick, co-Author "Bulls, Bears and the Ballot Box" (BBBB):
Q- Bob, how much credit should Americans give President Obama for today’s improved equity values?
BBBB – Our research reviewed American economic performance since President Roosevelt installed the first Federal Reserve Board Chairman - Republican Marriner Eccles. We observed that even though there are multiple impacts on the economy, it was clear that policy decisions within each administration, from FDR forward, made a clear difference on performance. And relatively quickly.
Presidents universally take credit when the economy does well (such as Reagan,) and choose to blame other factors when the economy does poorly (such as Carter.) But there was a clear pattern, and link, between policy and financial market performance.
Although we hear almost no one in the Obama administration taking credit for record index highs, they should. Because the President deserves significant credit for how well this economy has done during his leadership.
The auto rescue plan has worked. American car manufacturers are still dominant and employing millions directly and in supplier companies. Wall Street reform has been painful but it has re-instated faith amongst investors. The markets are far more predictable than they were four years ago, as VIX numbers demonstrate greater faith and less risk.
Even for small investors, such as thoughs limited to their 401(k) or IRA investments, the average annual compound return on stocks under President Obama has been more than 24% since the lows of March, 2009. This is a better result than either Clinton, Reagan or FDR who were the prior winners in our book.
Q- Bob, what policies do you think were most important toward achieving today’s new highs?
BBBB – Firstly, let’s review just how bad things were in 2009. In 2000 America was completing the longest bull market in history. But by the end of President Bush's tenure the country had witnessed 2 stock market crashes, and the DJIA had fallen 58%. This was the second worst market decline in history (exceeded only by the Great Depression,) and hence the term “Great Recession” was born.
In 2000, at the end of Clinton’s administration, the Consumer Confidence Index was at a record high 140. By January, 2009 this index had fallen to an historic low of 25.3. Comparatively, when Reagan took office at the end of the economically weak Carter years the Confidence Index was still at 74.4! Today this measure of how people feel about the country is still nowhere near 2000 levels, but it is almost 3 times better than 4 years ago.
Significantly, in 2000 America had a budget surplus. By 2009 surpluses were long gone and the country was racking up historic deficits as taxes were cut while simultaneously outlays for defense skyrocketed to cover costs of wars in Iraq and Afghanistan. Additionally, banks were on the edge of failing due to unregulated real estate speculation and massive derivative losses.
Today the Congressional Budget Office is reporting a $200B decrease in the deficit almost entirely due to increased revenue from a growing economy and higher taxes on the wealthiest Americans. The deficit is now only 4% of the GDP, down from over 10% at the end of Bush's administration - and projections are for it to be only 2% by 2015 (before Obama leaves office.) America's "debt problem" seems largely solved, and almost all due to growth rather than austerity.
We can largely thank a fairer tax code, improved regulation and consistent SEC enforcement. Also, major strides in health care reform - something no other President has accomplished - has given American's more faith in their future, and an increased willingness to invest.
Q- To which President would you compare Obama’s economic performance?
BBBB- By all measures, President Obama has outperformed every modern President.
The easiest comparison would be to President Reagan, who’s economic performance was superb. Even though Obama's performance is better.
Reagan had the enormous benefit of two major factors:
- a significantly better economy than Obama inherited, even if afflicted by inflation
- and his two terms coincided with the highest performing demographic years of the Baby Boomer generation.
Few people think of Reagan as a stimulus addict. Yet, his administration’s military build-up added $1trillion of stimulus to the national debt ($2.3trillion adjusted for inflation) - the opposite of what is happening during the Obama years. Many like to think that it was tax cutting which grew the economy, but undoubtedly we now know that this dramatic defense and infrastructure (highways, etc.) stimulus had more to do with igniting economic growth. Reagan's spending looked far more like FDR than Herbert Hoover!
Ronald Reagan tripled the national debt during his tenure, creating what today's Congressional austerity advocates might have called "a legacy of unpayable debt for our grandchildren.” But, as we saw, later growth (during Clinton) resolved that debt and created a budget surplus by 2000.
Q- Bob, President’s Obama detractors liken the Affordable Care Act (i.e. Obamacare) to an Armageddon on business, sure to kill economic growth and plunge the country back into recession. Do you agree?
BBBB- To the contrary, ACA levels the playing field and will be good for economic growth. Where previously only large corporations could afford employee health care plans, in the future far more employees will have far more equitable coverage. Further, today employees frequently are unable to leave a company to start a new business because they would lose health care, which in the future will not be true.
One leading indicator of the benefits of ACA might be the performance of healthcare and biotech stocks, which are up 20-30% and leaders in the current market rally.Q- What policies would you recommend the Obama administration follow in order to promote economic growth, more jobs and greater returns for investors during the second term?
BBBB- Obama needs to make the cornerstone of his second term creating new job growth. That was the primary platform of his candidacy, and it is a platform long successful for the Democratic party. If President Obama can do this and govern effectively, this could be his real legacy.