Obama and uncertainty

Since President Obama announced his health care plan and every subsequent serious discussion he has had about it since then, the market dipped led by the pharmaceutical industry. Also, since he announced his plan to reform the banks and place a levee or tax on them, the market sank led by the banking sector. Why is this? I mean, aren’t these the reasons why people voted him in to office in the first place?

Well, the answer is simple and it consists of only one word: UNCERTAINTY.

Uncertainty is the market’s worst enemy. It is like a cancer to its development and growth. When there is uncertainty in the market then investors, business people (entrepreneurs) and businesses themselves are less likely to take risks because in times of uncertainty it is much more difficult to assess that risk. Imagine jumping off a diving board head first and not knowing whether the water is 15ft deep or 3ft deep. More than likely you would first check to see the depth. However, market uncertainty makes it difficult to obtain an accurate read on that depth (i.e. the level of risk).

When the president announced the health care plan, it was very complex and contained many moving parts and fine details. Add to that the opposition’s negative opinions on it and that made the public and businesses very uncertain of what exactly it will do to drug companies and the overall US economy. In light of that, on days when it looked like the bill would pass, the affected companies’ stocks dropped and on days where it looked like it was dead, the drug companies’ shares moved up.

This pattern was even more noticeable in the banking sector. This week, there was one day where it looked like his banking reform plan would pass the congress eventually and the stock market led by the big banks, dropped like a rock and even blamed that plan as the reason for the drop. Now, this doesn’t mean that this banking plan is bad. In fact, all we ever hear these days and rightfully so, is that the government needs to increase its regulations over the banking industry. Also this tax that the president wants to place on banks is actually a small amount if you look at the size of these banks and the types of figures they throw around for just about anything. However, something new and not totally known creates uncertainty at first and that hurts the market.

Therefore, if you have been trying to formulate an opinion on the health care reform plan and the banking reform plan, it would be wise for you not to look at how the market reacts to it right now. If or when these plans pass and everyone becomes better acquainted with them, you will see that the market will end up responding favorably to them. Remember, it is not Obama that makes the market dip, it’s the uncertainty.