Hoped-for Obama bounce goes bust on the markets

Not even the feel-good U.S. election could spare investors from a week of stock market pain on Wall and Bay streets.

While Canadians could not vote in the American election they held out hopes that an Obama victory would sweep away the storm clouds gathering over world financial markets. Instead, the morning after the Democrats took control of the White House, markets first in Asia, then Europe, continued a relentless slide into uncharted water, swiftly drowning hopes of an Obama bounce.

The day of the U.S. vote, Toronto’s Financial Post remarked on “the biggest election-day stock market rally in 24 years”, but the optimism of Nov. 4 proved to be shortlived. Now two weeks after Obama’s win, that hope has morphed into a bumpy downhill ride for investors, one that shows little sign of slowing down.

On Wednesday, Nov. 12, the S&P/TSX Composite Index dropped 501 points, partnered with a dismal 411-point slide on the Dow Jones Industrial Average. On Thursday, both indices bounced back, and so the market yo-yo is expected to continue.

Historically, U.S. elections spark more sustained optimism among traders, but equity advisor Gareth Watson, of the brokerage ScotiaMcLeod, says he is not surprised by the volatility.

“Today is like no other post-election period that we have ever witnessed,” he says. “We literally almost had a collapse of the financial system on this planet a couple of months ago.”

In previous elections, the Wall Street’s honeymoon with a new president would generally last until at least the January inauguration, said investing consultant Andrew Willman.

“This is normally a positive period for the stock market,” he said. “People always fantasize that better things have to be just around the corner and any change, any kind change, very much impacts this perception.”

However, the election of Barack Obama, Canada’s presidential favourite, did not follow conventional wisdom. One factor might be the season, says one observer.

Lisa Kramer at the University of Toronto’s Rotman School of Management, studies the intersection of trader thinking and seasonal affective disorder (SAD), the mood swing reported to hit some people as autumn days grow shorter and sunlight diminishes in the northern latitudes.

Kramer cites the historic October market crashes such as Black Monday in 1987 and the market crash of 1929, which launched the Great Depression, linking the events to a tendency among SAD people, including traders, to back away from taking risks.

“I think economists are coming to terms, slowly, with the fact that economic agents, investors, are human and humans have emotions,” Kramer said.

Watson is more inclined to describe the post-election downturn as sensibly cautious behaviour by investors to an erratic market which presents confusing sudden spikes amid a general downward trend.

“[The stock market] has been uncharted territory for us in terms of volatility. It really has exceeded anything that we’ve seen in an extremely long time,” he said. “It’s quite natural for investors to get nervous and question what really is going on in the marketplace.”

Mechanical engineer Rob Stevens is a rank-and-file investor who makes a decent living and has a respectable portfolio of investments. Stevens is inclined to wait for the market to work through some more of its spasms before he makes any big moves to buy or sell.

“It’s just been a little bit turbulent enough,” he said. “Who knows where it’s going?”

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