Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 7/20) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics.

Has Obama’s slump in the polls boosted stock prices? The earth shook in Washington this past week as the administration’s push to enact health-care changes received a massive thumping from voters. Notwithstanding nonstop multiday hectoring from President Obama, polls indicate slipping support for his agenda, causing even his own party to slam on the brakes.

To my mind, the sudden drop in enthusiasm for the president (his approval ratings are now below Bush’s at the same time in his presidency – a shocker, right?) means some tempering of his legislative free-for-all. For investors, the setbacks suggest a timeout from the endless stream of anti-business initiatives flowing from the Obama White House.

There has been serious (and in my view reasonable) alarm over the administration’s inclination to meddle with a wide swath of industry. The cap and trade bill, the financial regulatory overhaul, the upending of corporate tax law, the new consumer protection agency, the takeover of the autos – these are just some of the proposals the Obama team have spun out in recent months – creating uncertainty and anxiety while the country sank into a recession. Only a few days ago there was talk of a second stimulus bill, a prospect that scared the pants off inflation and deficit hawks. With Rasmussen reporting that only 25% of Americans believe that the stimulus bill passed earlier this year has been effective, I think we can assign that particular notion to the meat locker.

It is true that there are other reasons for the market’s delightful 38% rally in the Dow that we’ve seen since March and the astonishing 11% jump over the past eight days. Without a doubt the collapse in housing markets has stabilized, and job losses appear to be mitigating. Existing home sales were up 3.6% in June to an eight-month high, reducing inventories of unsold units to 8.9 months, the lowest so far this year. Meanwhile, the four-week moving average of unemployment claims dropped to 566,000 in the latest period, down from the peak of 659,000 in April. A decline of this magnitude has in the past confirmed the end of a recession.

Moreover, second-quarter profits exceeded expectations for about 75% of those companies reporting so far. Reports out have beaten both analysts’ forecasts and in many cases the firms’ own projections, leading to a boost in estimates for the balance of the year. Normally some 60% of companies report better-than-expected results, since corporations know that coming in shy of projections is the quickest route to the doghouse. These surprises, though, seem genuine. When companies presented their outlooks around the beginning of the year, it looked like the U.S. was heading into a depression. Visibility was poor, to say the least.

Though all these factors have boosted the stock market, there remains enormous uncertainty, much of it tied to government policy. It has been decades since the government of the United States has appeared so anti-business, and decades since the need to support business has been so vital. We need people to be put back to work and while job losses may be slowing, companies are still loathe to add to payrolls. Increases in second-quarter profits came primarily from cost-cutting, including layoffs. Consequently, productivity rose to an impressive 3.8%. Revenue growth was weak at best.

Only the government is hiring. Ultimately, government spending can only provide a modest and temporary boost to the nation’s economy since it is coupled to rising deficits. At some point, paying back those deficits requires higher incomes and tax revenues from the private sector.