Stock Market Information

With the recent pop of the oil bubble in the short term, the U.S. dollar has continued to gain against other currencies, most notably the Euro. The drop in prices have allowed the dollar to vault back to an  seven month high, according to a recent article at CNN Money. But does this mean a longer term rally for the currency, or simply a blip on the radar of it’s seemingly inevitable slide downward. There are a number of factors to consider.

Much of what drives the long term decline of the dollar is our government running a rather large deficit. Each year we spend more dollars than we bring in through tax revenues and other means. So to make up the difference the U.S. Government is forced to borrow the money. With each passing year the deficit increases, causing a drop in the dollar’s value.

So what’s been driving the dollar upward over the past month? Bill Luby from Seeking Alpha had an explanation:

It is important to note that while the dollar has made a substantial move over the course of the past month that now has it breaking out of a three year downward channel, the dollar’s move is more the result of increasing concerns about foreign economies than it is about strength in the U.S. economy. The bottom line: the U.S. economic outlook has not improved over the past month; instead, things have taken on an even gloomier tone overseas.

Ultimately this means that if foreign economies manage a turn around, it’s likely that you’ll see the weakness in the currency resume. Unless of course the government manages to head back towards a more balanced budget, but neither candidate has made any such promise, and their planned economic policies would likely result in the same amount of spending if not more.

If someone were to stop you right now, and ask you which political party has meant better stock market returns while their party was in office at the White House, which do you think would fare better? My first guess was Republicans, given that their hands-off approach to the markets as well as their (former) fiscal conservatism as well as small government thinking meant that the stock market would flourish under the guide of a Republican president. It appears I was mistaken, though, as a recent article by Jeremy Siegel points out.

Here’s an excerpt from the article that gives a quick summary of how the markets have performed under presidents from either party over the past 120 years:

Historically, the initial reaction of the market to a Republican presidential victory confirms this thesis. During the last 120 years, the Dow Jones Industrial Average rose 0.7% on the day following a Republican victory in the presidential elections while it has fallen 0.5% the day after a Democrat captured the White House. However, a closer look tells a far different story. Over that same 120 year period, the average annual stock market return has totaled only 8.25% under Republican rule, while it has returned 10.85% with Democrats in power.

This should of course be taken with a grain of salt, given the president’s limited ability to directly impact the stock market’s performance or growth. It did fly in the face of my original thinking though, except in the short term, that Republicans would make for a better choice for better performance numbers on my investments.

That said, the best situation, historically speaking, is a political gridlock between the two parties. My guess is that with each branch at odds with the other it would be harder to pass comprehensive legislation ( and therefor regulation) and so the markets performed better during these periods. Just something to keep in mind, regardless.

I’ve never, ever been a big fan of debt. From living mortgage free to my refusal to take out loans if at all possible (though I have for some things when necessity dictated, such as my education). I’m a fiscal conservative at heart, and it really racks my brain to see how tolerant people are of borrowing, both at the consumer level and in the government as well. The U.S. government has run the country into more debt than ever before, and eventually it’s all going to have to be paid back. Not now, certainly, but future generations. We’re taking out a mortgage on our own future, and no one’s going to be pleased when it’s time to pay the piper. A recent article at Yahoo! Finance echoed these thoughts:

“Although interest rates remain historically low, Brusuelas says deficits definitely do matter from an economic perspective. The U.S. current account and fiscal deficits (a.k.a. the twin deficits) have directly resulted in “reduced purchasing power of the U.S. dollar” since 2002, meaning “higher inflation and a reduced standard of living for all Americans,” he says.”

Of course take that with a grain of salt, given that it’s only one economist, but lets just stick to the facts. The current account deficit is up 426% in the past 10 years. The dollar has taken a serious plunge in value, inflating commodities that are pegged to the dollar like oil. This in turn has cause pain at the pump for Americans across the country as more of their discretionary income gets devoured by things like gas and food. Directly deficit related or not, it’d be hard to make a case that it’s had no effect at all. It also doesn’t prove that we the country can possibly continue running a deficit without severe consequences of the future.