Is President Obama Creating a Crisis of Confidence in the Markets?

You would hardly know it by the simple fact that the S&P 500 (^GSPC 0.02%) and Dow Jones Industrial Average (^DJI -0.11%) have rallied 150% and 135% from trough to recent peak since the recession, but investor and consumer skepticism appears to be building.

Many of the factors that influence investor optimism are certainly pointing to a strengthening economy. Historically low lending rates are allowing businesses to refinance their debt and take on new debt to make acquisitions; the housing sector is finally finding its footing, with homebuilders cautiously controlling their inventory to maintain pricing power; and the unemployment rate is tracking along at its lowest level since December 2008. Combined, these are just some of the many reasons both iconic U.S. indexes have hit new all-time highs this year.

A crisis of confidence
But the past two weeks have brought a swift and decisive change in the wind. There are literally a myriad of reasons as to why we're seeing this relatively minor sell-off in both indexes that's totaled 3.2% for the S&P 500 and 3.7% for the Dow. No joke; ask 100 analysts on Wall Street and you'll probably get 100 different answers.

Source: White House on Flickr.

However, one stark dissimilarity that I've picked up on between the markets and public perception that has grown wider in recent months is the approval of ratings of President Obama and Congress in general. In a perfect world, the economy would flourish without the need for government intervention -- but we are nowhere near a perfect scenario. The economy is still somewhat fragile coming off the worst recession in 70 years, and it's needed a few pick-me-ups along the way from the Federal Reserve. I only need to point to the ongoing monetary easing policy known as QE3 by the U.S. central bank as all the more reason that intervention is occasionally needed to calm investors' nerves.

The disparity, though, between a rising market and growing skepticism boiled over this past week, when Gallup released its latest poll highlighting respondents' approval or disapproval of President Obama in nine separate categories, with a 10th category relating to a cumulative job approval. According to the poll, which questioned some 2,059 adults, only 35% approve of Obama's handing of the economy, 36% of his handling of taxes, and just a paltry 26% approve of his handling of the federal budget deficit.

Here's a look at the full poll: 

Source: Gallup. Race relations and education were not rated in June 2013.

I know what you're probably thinking. "Oh, great, here comes the political diatribe!" The good news is I have no political slant to dish. Instead, I'm looking at this from how an investor might view these figures, and I see some concerning trends.

It's the economy, stupid!
The big red flag in this poll is how rapidly respondents' approval in economy-related factors is dropping, even as the markets hit multiple new all-time highs. Is this entirely President Obama's fault? Not necessarily, but as the president, he's often going to be held accountable one way or another.

In June, a Gallup poll that questioned the confidence of respondents with regard to 16 different institutions showed that Congress came in dead last of the 16, with just 10% of respondents having "a great deal" or "quite a bit" of confidence in the governmental body. It certainly isn't hard for investors to be pessimistic about the U.S. government when Congress has failed, on numerous occasions, to come to a consensus on the U.S. debt ceiling until the absolute last minute.

The quality of job creation has also been another very serious concern. While unemployment has happily fallen from a peak of 10% to a more "manageable" 7.4% in July, the majority of all job creation since the start of the year -- 77%, to be exact – is part-time in nature. Of the 953,000 jobs created, just 222,000 are full-time, according to the St. Louis Federal Reserve. Businesses have been willing to refinance their debt, but cost-cutting and ongoing skepticism haven't led to many full-time positions. Tack on the imminent enactment of the Patient Protection and Affordable Care Act in January 2015, and you have all the more reason for businesses to sidestep hiring people on a full-time basis.

It's affecting big business
Combining these factors together creates a picture where consumers may feed off this negativity and spend less despite a market that keeps running higher. Wal-Mart (WMT 1.32%), the largest employer in the U.S. at 2.2 million people, earlier this week reported a surprising 0.3% decline in second-quarter same-store sales and lowered its full-year profit and sales forecast. Last quarter, Wal-Mart was given a bit of a pass because delayed tax refunds and the immediate shock of the end of the payroll tax holiday were still working their way down the chain, but this quarter truly exposed what could be a very scared consumer who isn't nearly as confident in the economy or the government as we'd like to think. 

But it isn't just retailers that are exhibiting these disturbing signs. Cisco Systems (CSCO 0.06%), just hours before Wal-Mart, reported second-quarter results that showed signs of slowing revenue growth and delivered third-quarter guidance that handily missed the mark. Furthermore, Cisco announced a second round of job cuts, this time 4,000 jobs, or 5% of its workforce. The quandary here, to summarize fellow Fool Rick Munarriz: How can Cisco expand production if it's shedding workers?

The concern here is that if consumers are losing faith in Congress and in President Obama, how can we expect them to continue to spend? To add, how can we expect these same people who are running America's small and large business to expand their workforce when deep down the majority appear to be losing confidence in the U.S. economy? The answer, I believe, is that we can't count on consumers to go against their gut, and that, ultimately, seems like a viable reason the markets appear long overdue for a pullback.