If you were watching the stock markets the day after Obama won the 2012 election, you would have noticed an interesting reaction to the news. Wall Street threw a temper tantrum; the Dow Jones Industrial Average (DJIA) plummeted more than 300 points during the course of the day’s trading. The DJIA, NASDAQ 100, and the S&P 500 are averages calculated from the stock prices of a number of successful companies and are considered somewhat of a barometer of how the overall markets are doing.
The stock markets are supposed to reflect the current or expected future value of the companies listed on them and can be influenced by a number of external factors. As indicated by the après-election drop, politics is one of them, and I have three theories as to why this particular politics-related drop occurred and why we should care.
Before proceeding, I have to specify that for the purposes of this article, Wall Street signifies more than a physical street in New York’s financial district. It is a metonym for the investment banking elite who have the power to greatly influence the stock markets. This reality leads to my first theory about what the stock market reaction to the election really reflects.
As defined, Wall Street is a conservative institution, so perhaps it threw a temper tantrum because the team it was rooting for lost. Under that scenario, the winner of the election was an “Obummer” and the drop had nothing to do with the real value of stocks. This is cause for concern, because stock markets are important not only for raising capital for businesses, but also for people who invest money for retirement: drops have real-world consequences. It is possible Wall Street instigated market panic ‘because it was pissed’. Pettiness amongst the financiers that run the economy is disturbing in theory; in action, it is truly alarming.
Alternatively, Obama’s victory may have caused Wall Street to expect a loss of profitability, which was reflected in the drop. The implications of this are almost more disturbing than if the drop was a petty reaction. Wall Street makes investments and expects to make profit on those investments. A bad investment negatively influences its overall profitability. In 2012, Wall Street was on track to break campaign spending records: $167 million was spent influencing Americans to vote for either Romney or Obama. Wall Street wanted Romney to win because he was a multi-million-dollar investment that should have been profitable. Since he did not win, the profitability of Wall Street may have taken a serious blow, which was represented by the post-election drop. This is a disturbing concept because it suggests that the ‘real Mitt Romney’ was probably someone capable of facilitating Wall Street’s aspirations to make a killing, to such an extent that Obama’s victory hurt its overall profitability.
My final theory is that conservative business media planned to exploit “weakened economy” stories if Obama won. In other words, prior to the election conservative business news had decided to concentrate on stories concerning the health of the American economy if Obama won, using weakened economy stories as an “I told you so” to the American voter.
Just like politics, the media also can have an impact on the ups and downs of the Stock Market. A case in point which appeared in the media the day after the election: the fiscal cliff, a scary but sound-bite friendly term for the expiration date for a number of Bush-era tax cuts which will result in higher taxes and likely have a negative effect on the overall economy. Prior to Obama winning the election, there was nary a peep about the fiscal cliff in the news and now Market Watch has a doom clock counting down the seconds until the United States hits the cliff.
It is undeniable that the fiscal cliff is a big problem that needs to be solved, but it is significant that it hit the headlines beyond the business page right after Obama’s victory. I think it would have received less news attention if Romney had won. Conservative business news portrayed Romney as the savior of the economy and Obama as its scourge, making the fiscal cliff a perfect transition from “Obama won” to “we’re all screwed, nice choice America.” If the media is willing to incite panic in the markets to prove Romney should have won, it demonstrates a level of pettiness comparable to the Wall Street of my first theory. That said, it is not as likely that media coverage of the fiscal cliff caused the initial drop, but it probably played a role: stock markets have been in steady decline ever since.
Whether any of my theories are true or not, the market drop shows that Wall Street has the power to instigate panic in the markets. Concordantly, the economic health of a country is key to the support of the politicians running it. When Wall Street can cause the stock markets to plummet in an afternoon, the power it is capable of wielding over politicians and the motivation behind its actions matters becomes a concern to everyone. This is particularly true if theory one is in play — the inevitable outcome of a spoiled child not getting what is wants is a tantrum — in this case, with dire consequences.
Chris Peppin is a fourth-year MIT student who loves Journeys to Nowhere in Particular and hates When I Hate Things and Closed Minds.