How come the stock market has been tanking ever since Republican insurgent Scott Brown took Teddy Kennedy's Massachusetts U.S. Senate seat Tuesday in the upset of all upsets?
I've been saying for the last nine months, most recently just before Christmas, that the secret behind the historic stock market rally from the March 2009 bottom has been the failure of the Obama administration and the Democratic Congress to ram through their budget-busting anti-growth agenda. So now that Brown has denied the Democrats their filibuster-proof majority in the Senate, and a wave of anti-incumbent sentiment seems to be sweeping the land, why would stocks suddenly go down?
Remember, historically, on average, stocks have done best under divided government -- when the presidency, the Senate and the House are not all controlled by the same party. That's where we seem headed now as we head into the 2010 congressional elections, when the Democrats will certainly lose their commanding majorities -- and in the House, might in fact become the minority party. So with that in prospect, why have stocks gone down?
It's partly an example of that old Wall Street maxim: "Buy on the rumor, sell on the news." The time to have bought stocks was last summer, when there were just the earliest hints that one-party rule in Washington might fall apart.
Now, with Brown's election, it's obvious. So it's time to take profits.
And it's partly because of factors that have nothing to do with politics or policy at all. As I wrote here two weeks ago, consensus earnings expectations have been rising more rapidly than I've ever seen before -- it's off the charts. That's good, but it means the actual numbers reported during earnings season, even if they are very good numbers, still won't be good enough to meet those supercharged expectations.
You can't deny there's some of that going on. Look at Intel (INTC), JP Morgan (JPM), Google (GOOG) -- I could name others, too -- companies that have blown the doors off on earnings this quarter, but whose stocks have fallen dramatically following the announcement. In a nutshell, expectations have gotten a little ahead of reality. After more than a 70% gain in stocks in a little over 300 days, we're long overdue for a correction. I've been saying that for a couple months. I was early.
But now it's coming true.
That said, there is a political side to what's been happening in stocks this week. It does relate to the Brown election in Massachusetts, just not in the way you might first think. Brown didn't win because he was a conservative or a Republican. He won because he opposed the corrupt "machine" politics of a state so deeply controlled for so long by a single party, the Democrats, that it has become corrupt and sclerotic. Brown’s campaign was a benign form of populism.
That struck a chord in a national context because the one-party rulers in Washington are seen now by many as having become arrogant and brutal -- willing to pull every dirty trick in the book to get some kind of health-care legislation passed seemingly without caring very much about what the legislation even contains. Even some of those who support health care legislation are getting a little sick at the way the process is being managed. The problem is that, historically, such rage has often been exploited by populists who have usually been violently anti-business -- especially anti-Wall Street. Their agenda is all about taxing, regulating or otherwise redistributing the wealth of the great moneyed interests for the benefit of workers and farmers.
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RT @SmartMoney: A Republican Won, So Why the Selloff? http://bit.ly/7zlSyR
Great Points here! buy the rumor, sell the fact RT @SmartMoney A Republican Won, So Why the Selloff? http://bit.ly/7zlSyR
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