This is a syndicated repost courtesy of Confounded Interest – Online Course Notes for Financial Markets. To view original, click here. Reposted with permission.
There was a misleading headline on Yahoo Finance entitled “Stocks did better in Obama’s first year than in Trump’s”
The stock market has rallied during Donald Trump’s presidency, with the S&P 500 up nearly 24% during Trump’s first year in office. But here’s a surprise: It did even better during President Obama’s first year, rising 35.3%.
Source: Yahoo Finance
Well, Obama was the benefactor of the single biggest intrusion in financial markets in history: The Federal Reserve’s zero-interest rate policies coupled with massive Treasury and Agency MBS purchases.
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Notice that the stock market crashed in 2007-2008 and The Federal Reserve responded by dropping their target rate from 5.25% in September 2007 to 0.025% in December 2008; a 500 basis point decline prior to the 2008 Presidential Election (won by Obama). In addition, The Fed started their infamous “Quantitative Easing (QE)” program in early 2009 after Obama took office.
So much accelerant in such a short period of time was bound to drive asset prices up in 2009.
But a curious thing happened around Trump’s election in 2008. The Fed raised their Fed Funds target rate exactly once during Obama’s term in office (as of the 2017 election), but has raised the rate 4 times since the 2017 election. And QE, which helped Obama in 2009 ceased in late 2104.
The Yahoo story should have been titled “The Fed helped stocks do better in Obama’s first year than in Trump’s.”
Unless you call unwinding the balance sheet at glacial speeds “helping.”
And the article left out the repression of volatility that occurred with ZIRP and QE. Volatility was still in play during Obama’s rookie season, but deader than a doornail by the time Trump’s first year rolled around.
Here is a photo of Ben Bernanke taking a last hit of “Stoxygen” before handing the controls over to Janet Yellen.
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