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 (SNPINDEX: ^GSPC  ) and Dow Jones Industrial Average (DJINDICES: ^DJI  ) 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.

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: 

President Obama's Job Approval Rating

% Approval June 2013

% Approval August 2013

% Change

The economy

42%

35%

(7%)

Taxes

41%

36%

(5%)

Federal budget deficit

31%

26%

(5%)

Terrorism

53%

50%

(3%)

Foreign affairs

43%

40%

(3%)

Immigration

40%

39%

(1%)

Health-care policy

40%

39%

(1%)

Race relations

--

51%

--

Education

--

49%

--

       

Overall job approval

47%

44%

(3%)

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 (NYSE: WMT  ) , 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 (NASDAQ: CSCO  ) , 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.

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Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2013, at 1:59 PM, comosichiam wrote:

    OBAMA IS LIKE THE PLAGUE ANYTHING HE GETS NEAR BECOMES A DISASTER HE HAS TO BE ONE OF THE BIGGEST IDIOTS OF ALL TIME OR A CLEVER MANCHURIAN CANDIDATE PLANTED TO DESTROY OUR COUNTRY.

  • Report this Comment On August 17, 2013, at 2:06 PM, bobbyk1 wrote:

    Cosmo sounds like hes been sitting in cash for 4 years.The President is responsible for the economy but it would be nice if he got a little help from Congress in the way of tax reform,infrastructure spending and maybe a path to bring some corporate profit back from overseas.

  • Report this Comment On August 17, 2013, at 3:14 PM, Tsinky wrote:

    The only declines in this survey that are large enough to be of any significance are the economy, taxes, and the deficit. The author gives no specific reason for the decline in approval over the economy. He cites only the payroll tax increase, which took effect eight months ago, as a reason for the decline in approval over taxes. The deficit is falling and has been for three years now, but a significant percentage of Americans don't believe it because they have been fed a steady stream of lies about this and other things.

    Some businesses are using the ACA as an excuse to delay hiring or hire only part time, but they will suffer in the long run as they fail to recruit and retain good employees who will increase the value of their businesses for shareholders.

    If the economy really were in decline, Walmart would be cleaning up as more people would be falling out of the middle class. Cisco cited soft overseas markets as a reason to lower guidance.

    This is just one snapshot. Let's wait for indications of an actual trend before we declare that the sky is falling.

  • Report this Comment On August 17, 2013, at 3:30 PM, Mega wrote:

    It's funny because the federal deficit has declined in the past month, yet his approval rating on the deficit has crashed.

    There's no real relationship between reality and opinion poll swings, it's just noise.

  • Report this Comment On August 17, 2013, at 6:20 PM, paule32 wrote:

    And all along I was thinking that the market pullback might be related to the troubles in Egypt. But I should have known as in all things, it's Obamas fault. Thanks for clearing that up for us.

  • Report this Comment On August 17, 2013, at 8:40 PM, gimtagel wrote:

    I have to agree that Mr. Comosetc is economically comatose. I also have to agree with the valid points mentioned by paule, Mega, and Tsinky. The market has been looking for a reason to correct. Why not just look at the facts, Mr. Williams. Wal-Mart and Cisco aren't blaming the President, so why are you? No political slant, indeed.

  • Report this Comment On August 18, 2013, at 12:37 PM, brad1breather wrote:

    in my opinion, +yo-momma" has done nothing that has or will benefit America.

    his own words confirm him as a muslim and their goal is to destroy the infidel(America).

    America will not be safe until he is out of or removed from office.

    an office many noble Americans have held with honor but not in the past 5 years in my opinion.

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