Has the Reverse Invisible Hand Been Responsible For The Dismal Performance of US Equity markets?

The US markets is on a milestone…a milestone low.

And Chart of the Day tells us ``The Dow is currently down 53.4% since peaking in October 2007. To put the magnitude of the current correction in perspective, today's chart illustrates the 15 worst corrections of the Dow since its inception in 1896. As today's chart illustrates, the current Dow correction already ranks as the second worst on record. Only the correction that began in 1929 was worse.”

While we often resist the temptation to attribute market movements to politics, this observation from Bespoke seems worthy to contemplate on.

From Bespoke Invest (bold highlights mine), ``While Washington has lauded the $787 spending bill as the medicine that will help bring the economy out of the recession that President Obama 'inherited,' the market is taking a different view. Consider this -- since the spending bill was passed by Congress on February 13th, the S&P 500 has lost over $1.8 trillion in market cap, which is over twice the size of the plan signed into law! The question for economists now is whether or not the positive multiplier effect associated with the spending bill will be enough to offset the negative multiplier effect from the proportionately bigger decline in the value of US equities in the pension funds, IRAs, 401k's, and investment accounts of Americans.”

Is this merely a coincidence? Or is the market signaling disapproval on government's action? The market losses have apparently been greater than the stimulus packages drawn up by the US government.

More from Bespoke, ``As shown in the chart above, during the first few weeks of President Obama's Administration, the Dow was rangebound with a slight negative bias. It wasn't until the stimulus bill was signed and the budget unveiled that the bottom fell out of the market. Since Inauguration Day, the Dow has declined 1,686 points (20.4%). Of those 1,686 points, 1,253 have come since the passage of the stimulus plan. While there are certainly plenty of other issues weighing on the market, it's hard to argue that the "stimulus" and budget proposal haven't had a negative impact. While the Bush Administration was criticized by investors for lacking clarity in its policies regarding the economy, Wall Street clearly is not comfortable with the actual clarity coming out of Washington today.

``With a 20.37% decline since Inauguration Day, the Dow's performance during President Obama's Presidency already ranks as the third worst among US Presidents since 1900.”

We saw a media jester convey a message in a show that markets don’t accurately reflect on people’s sentiment. That’s plain hogwash. People can say something but do the opposite. On the other hand, we suggest that markets reflect on actual votes-in terms of money in or out of their wallets. It signifies something like “people voting with their feet”.

Besides the US markets have nearly half of its populace exposed to the financial markets.

ICI estimates that some 52.5 million, or 45.0 percent, of households in the United States owned mutual funds.And the biggest share as shown above is in the ownership of stocks.

And likewise the US census estimates that 50.3% of households had exposure in stocks in 2005.

With the torrent of bailouts and or stimulus money thrown to rescue several companies in a funk, the Nasdaq OMX has created last January 5, “The Government Relief Index” meant “to measure the performance of the 21 stocks that received at least $1 billion in emergency government funding, is down a whopping 58 percent.” (US Global Investors)

This perhaps could be seen as another sign where markets appear to be refusing the endorsement of the hodgepodge of government sponsored programs which in essence marks a reversal of the invisible hand.

Which brings to fore a fitting quote from Peter L.P. Simpson posted at the Mises Blog,

``There is, one might even suppose, a reverse invisible hand at work. The free market is said to produce order and success as the unintended result of many producers and sellers and buyers independently pursuing their goals. So the controlled market seems to produce chaos and failure as the unintended result of many voters and politicians and bureaucrats independently pursuing their goals. Unlike the invisible hand of the free market, the reverse invisible hand is not benevolent. It is malign. It is the chief cause of economic booms and busts and of the accompanying delirium and distress where outrageous profits jostle alongside outrageous losses.” (bold highlight mine)