There is no doubt traders will be looking for policy clues in President Barack Obama’s State of the Union address Tuesday night. But historically, the speech has been shrugged off by the Street.
Looking back to 1961, when John F. Kennedy was president, the Dow Jones Industrial Average has only moved 0.69% in either direction on average on the trading day following the speech, according to a FOX Business analysis of data compiled by S&P Dow Jones Indices. The blue-chip barometer’s post-address performance was split almost exactly evenly between gains losses, although the losses tended to be slightly heavier.
Indeed, the biggest selloff came after Bill Clinton’s final State of the Union in January 2000. Clinton lobbied for a quarter-trillion dollar tax-cut proposal, tax breaks for pharmaceutical companies pursuing drugs to fight diseases like AIDS and tuberculosis, and tighter gun control laws, among other issues. The Wall Street Journal’s Jeanne Cummings wrote at the time that Clinton’s address was “most notable for its lack of drama.”
So, why did the Dow tumble 2.6% the next day? In a turn of events that may seem counterintuitive, yet strangely familiar to anyone observing recent market trends, a round of strong economic data sparked the rout. A better-than-expected report on U.S. gross domestic product “flamed the embers of anxiety about how aggressive the Federal Reserve will be about tightening monetary policy this year,” Robert O’Brien wrote for Dow Jones Newswires. O’Brien only gave Clinton a passing mention, noting the president was easier-than-expected on prescription drug costs.
On the other end of the spectrum, the Dow surged 1.9% in January 1991 after President George H.W. Bush pledged the U.S. would come out victorious in the First Gulf War. History would prove him right – but that isn’t what moved the markets the following day. Instead, investors grew more hopeful the American economy would climb out of recession, bidding up cyclical stocks and dumping U.S. Treasury bonds.
The Journal’s Douglas Sease only mentioned the war in the Mideast in one sentence that day, writing “the apparent success of an allied ground force in repelling an Iraqi thrust into Saudi Arabia helped buoy investor sentiment in the stock market.”
Incidentally, the second-biggest post-address rally in the past half century came after George W. Bush’s January 2002 speech in which he declared the war on terrorism and coined the phrase “axis of evil.” Still, the Dow’s 1.5% rally wasn’t ignited by the junior Bush’s patriotic calls – it was all about the economy. The Journal’s O’Brien wrote that the Fed halting a cycle of 11-straight rate cuts provided “implicit indication that the economy has taken steps toward growth” and unleashed the Street’s bullish attitude.
Of course, things could always be different this time around. Wall Street has been intensely focused on Washington, D.C. for the past several months as lawmakers have quibbled over the fiscal cliff and the debt ceiling. Now, a new fight over sequestration – a set of painful spending cuts set to trigger in less than three weeks – looms.
In fact, Goldman Sachs’ equities team specifically warned its clients about the continued fiscal perils in its equities allocation update late last week.
“We expect the U.S. economy to evolve as a balancing act between a positive impulse from the private sector recovery and a negative impulse from fiscal retrenchment,” the analysts wrote.
The influential investment bank also slashed its three-month outlook on equities to “neutral” from “overweight,” specifically citing the American fiscal outlook as a downside risk.
President Obama, you're up.
Brandy Zadrozny contributed reporting.