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Will Obama Optimism Boost Stocks?


A more encouraging lesson from 1933.

Finally, a Great Depression comparison to smile about.

The months between Barack Obama's election and his inauguration on Tuesday were downright ugly for the stock market. So ugly, in fact, that the 14% drop marked Wall Street's worst performance ever in expectation of a new president, according to Bloomberg.

During the 77-day span, markets swooned, unemployment spiked, Bank of America (BAC) was rescued by the federal government, and the country's biggest banks fell to levels not seen in decades.

It should come as no surprise that the second worst drop took place while nervous Americans waited for Franklin Delano Roosevelt to take office in 1933. What transpired for the rest of that year, however, gives Wall Street historians hope that the sky might not actually fall in 2009.

The stock market, led by familiar names such as General Electric (GE) and Proctor & Gamble (PG), rallied as much as 75% in 1933.

In fact, a few weeks back, I posted a chart on the Buzz and Banter which showed that the market's darkest times often yield its finest returns. Two of the S&P 500's 5 best years occurred during the 1930s, a time not widely known to have been kind to stocks.

And while myriad differences are often cited between the Great Depression and our current economic malaise, the lessons of 1933 shouldn't be lost on investors. Even if one's long-term outlook is negative, to be blind to the possibility that stocks could rally -- for longer than may seem rational -- is to miss out on ample opportunities.

In just the past 2 days, more than a few friends, family and colleagues have said that the changing of the guard in Washington left them markedly more optimistic than before. Psychology is as essential to market actions as are dollars and cents, and the pervasive optimism Obama brings to the White House cannot be ignored.

It's a fool's errand to claim meaningful prescience when it comes to the movements of markets or individual stocks, but it remains useful -- and profitable -- to recall that, though history rarely repeats, it often rhymes.
No positions in stocks mentioned.

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