Obama, Optimism, and Equities - A Rational Viewpoint

There is no doubt a feeling of unbridled optimism among many U.S. citizens who feel that President Obama will undoubtedly bring "change" to the United States. If we are to take yesterday's mass euphoria as an indicator of this coming "change" it will likely result in 0% unemployment, 10% GDP growth, and the re-emergence of a pre-ABS financial system (excuse the sarcasm).

While I feel that our new President will surely take the actions he sees necessary to stimulate economic activity it seems almost inevitable that the results will fall short of expectations. This is especially true when we look at the latest iteration of a fiscal stimulus package based on ineffective government spending and tax cuts aimed at a consumer whos marginal propensity to consume is at its lowest level in over 60 years. This ill-planned and undersized fiscal stimulus package coupled with the limitations now facing monetary policy (as we are up against the zero bound) equates to a long road to economic recovery.

As the realization that Obama will not be able to wave a magic wand and return the United States to economic prosperity in the blink of an eye results in a drastic reassesment of people's expectaitions we can expect further and increased contraction in economic activity (i.e. decreased consumer demand, capital investment, etc.), and as a result further downward pressure on the equity markets as we work our way through 2009.