Tag Archives: Dow Industrial Average

11.10.2012 | Can Stock Markets Predict Elections?

No one seems to be talking about what really might have led to the Obama win.

The stock market.

The basic reasoning is that people connect their “social mood” to the incumbent and social mood directly relates to how the stock market is performing. Some think the mood precedes the market and others say the opposite. Whichever the sequence, though, there seems to be a correlation between rising stock markets and incumbent reelection. For President Obama, during his first term, the Dow had a compound annual gain of 8.8% as of October 24.

Sources and Resources: Just before the election, Floyd Norris wrote about the Dow and elections and presented the following chart. You also might want to read this econlife post about the correlation between Tweets and stock markets. (Researchers were surprised that they could use Tweets to predict market changes rather than the opposite.) Finally, I did see the term “social mood” in this paper but was not familiar with its academic source.

Posted by: adminEcon
Tags: Barack Obama, Bill Clinton, Dow Industrial Average, election indicators, election predictions, floyd norris, Jimmy Carter, Mitt Romney, social mood, stock market predictions, Tweets, Twitter
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09.24.2012 | Election Economics: Assessing the US Economy

Is the US economy less sick? Comparing January 2009 when Obama became president and now, let’s see how its “symptoms” have changed.

Approximately the Same:

Jobs: During January, 2009, the employment number, 133 million, was very similar to today’s. Unemployment too, was close to 8% then and during August.
Incomes: Close to $32,000, average real disposable income is pretty close to where it was 4 years ago. By disposable income, we mean the amount we have left to spend after taxes and inflation.
Homeowners’ Equity: The amount of ownership people have in their houses remains at approximately 40%. (In 2005, homeowners’ equity was far better at 60%. But then the stock and housing markets crashed and we also had the Dec. 2007-June 2009 recession.)

Worse:

Gasoline prices: The average price of a gallon of regular gas went up from $1.79 to $3.72.

Better:

Stock Markets: Reflected by the Dow, stock market indices have soared but they are only returning to previous highs that pre-dated 2009.

This Washington Post chart from financial columnist Robert Samuelson summarizes the data:

	2009	2012	Percent change

Jobs (in millions)	133.6	133.2	-0.3

Unemployment rate (percent)	7.8	8.3	+6.4

Disposable per capita income (2005 dollars, adjusted for inflation)	$32,417	$32,778	+1.1

Average hourly earnings	$22.03	$23.52	+6.8

Inflation (January 2009 = 100)	100	107.9	+7.9

Gallon of gasoline	$1.79	$3.72	+107.8

Dow Jones industrial average	8,281	13,292	+60.5

Consumer confidence(1985 = 100)	37.4	60.6	+62.0

Where does it all take us? To the GDP.

As a measure of our overall health, GDP, the dollar value of the goods and services we annually produce, is an ideal “thermometer.” During the first quarter of 2009, the GDP decreased at a 5.9% rate. Currently, for the second quarter of 2012, it grew 1.7%. So yes, the GDP has improved considerably but, with a 1.7% growth rate, it is still not healthy. (Here is more GDP data from the Bureau of Economic Research, BEA.)

And finally, returning to the candidates, which “medicine” will make the GDP better?Obama/Biden’s government remedies or Romney/Ryan’s business cure?

Sources and Resources: Many of the ideas and almost all of the stats I cite are from Robert Samuelson’s September 6th Washington Post column, “Are Your Better Off Now Than Four Years Ago?” To compare the “better off” question with other presidencies, this WSJ.com interactive is fascinating.

Election Economics Topics:

Posted by: adminEcon
Tags: 1.7%, 8.1% unemployment, Are we better off?, disposable income, Dow Industrial Average, economic statistics, employment, GDP, housing, Obama/Biden, Robert Samuelson, Romney/Ryan, sluggish growth, stock markets, unemployment
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10.11.2011 | October Stock Markets

During October 1907, when the stock market crashed and the banking system panicked, we had no central monetary authority. We just had J.P. Morgan.

“Why don’t you tell them what to do, Mr. Morgan? (Belle da Costa Greene, J.P. Morgan’s personal librarian)
“I don’t know what to do myself, but sometime, someone will come in with a plan that I know will work; and then I will tell them what to do. (J. Pierpont Morgan)

Here is a description of events that preceded the 1907 panic:

“A … moralist was in the White House. War was fresh in mind. Immigration was fueling dramatic changes in society. New technologies were changing people’s everyday lives. Business consolidators and their Wall Street advisors were creating large, new combinations…The public’s attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society…Much of this was stimulated by…economic expansion.”

Sounds familiar.

(Quotes are from The Panic of 1907, pp. 2-3; 97)

The Economic Lesson

On October 1, 2008, the Dow Industrial Average closed at 10,831. Only 10 days later, it was at 7773.71.

1907, 1929, 1937, 1987 also had October plunges. With 16 stock market crashes during the 20th century, October has had a disproportionate share.

An Economic Question: During 1907 and 2008, the GDP declined. How might stock market crashes and banking panics relate to a contraction in the economy?

Posted by: adminEcon
Tags: banking panics, Dow Industrial Average, J.P. Morgan, Panic of 1907, stock market crashes
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08.19.2011 | Stock Market Crashes

How to define a stock market crash? One economic paper has 2 suggestions:

“When you see it you know it.”
Look at depth and duration: A 20% drop is a crash while length can vary. Several possibilities: 1 day, 5 days, 1 month, 3 months, 1 year.

Suggesting we have undergone 15 major stock market crashes during the 20th century, Professors Mishkin and White say the most drastic 2-day losses were during 1929 and 1987:

On October 28, 1929 the Dow fell 12.8% and then, the next day, took another 11.7% slide.
For October 19, 1987, the drop was 22.6%.

More recently, the Dow plunged from 11,616 to 6,547 between August 14, 2008 and March 9, 2009.

And that takes us to today. The Dow has tumbled 14% since its April 29 high of 12,810.54 while the S&P has declined 16%.

Perhaps most crucially, Professors Mishkin and White ask whether crashes are consequential. Their answer? For a correct diagnosis of our economic ailments we need to focus on financial instability rather than stock market volatility.

An Economic Lesson

The key difference between 1929 and 1987 was the economy. 1929 marked the beginning of the Great Depression with industrial production plummeting each year from 1930 to 1932 (-8.6%, -6.5%, -13.1%). By contrast, during 1987, the GDP increased 3.2%.

An Economic Question: How might the impact of a stock market crash ripple through the economy?

Posted by: adminEcon
Tags: 1929, 1987, Dow Industrial Average, GDP, Great Depression, stock market crashes
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10.25.2010 | Stocks and Tweets

An Indiana University researcher thinks he has confirmed that mood and stock market movement correlate. The results, though, were not what he expected.

1) Originally, he and his students thought that they would discover a positive relationship between the direction of the Dow and Twitter sentiment. However, the connection was not sad tweets on down days and happy ones after the Dow went up. It was “calm vs. anxious.”

2) The big surprise was that their original prediction was backwards. Looking at millions of tweets for emotional indicators, they discovered that the tweets came first. A slew of calm tweets meant the Dow would probably rise. Anxious tweets and it fell. Their accuracy? An 86.7% success rate.

Can Twitter be used to predict the Dow?

The Economic Lesson

The Dow Industrial Average is an index number. Computed through a formula that uses the stock prices of 30 large companies, it provides an indication of the direction of financial markets for a specific time.

Stock price movement is one component of the Index of Leading Indicators that is compiled by the Conference Board. As a “leading indicator” it helps predict where economic activity is heading.

Is Twitter sentiment a leading indicator of a leading indicator? You might find an answer in A Random Walk Down Wall Street by Princeton professor Burton Malkiel.

Posted by: adminEcon
Tags: Dow Industrial Average, Twitter
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