Does The President Really Control The Economy?
Throughout history, many U.S. presidents have had their legacy engraved by the way the economy behaved during their time in office. For example, President Ronald Reagan is credited for a stellar economy, yet the crash of 1987 took place while he was in office. At the start of President Reagan's first term in January, 1981 the highly followed Dow Jones Industrial Average (DJIA) was trading around the 950.0 level. Throughout 1981 to 1987 the Dow Jones Industrial Average rose to a high of 2746.70. This is quite a surge in the stock market when DJIA can rise by nearly 200.0 percent in just six years. Did President Reagan implement policies that were so good for the economy that the stock markets just took off to the upside? I would not be so sure about that.
President Bill Clinton will most likely be remembered for a robust economy as well. Under President Clinton's leadership the Dow Jones Industrial Average climbed from 3232.00 at the start of his first term in 1993, to a high of 11,750.28 in January 2000. That is a gain of more than 250.0 percent in just seven years. Did President Clinton implement policies that were so good for the economy that the stock markets simply took off to the upside? I would not be so sure about that either.
As we all know, the president of the United States does not control interest rates, the Federal Reserve Bank does that. When President Reagan first entered office the fed funds rate was around 19.0 percent. The fed funds rate is the overnight lending rate to the large banks not the prime rate which the public pays for a loan. At the time, Paul Volcker was the Federal Reserve Bank chairman. Once he began to cut interest rates the stock markets soared like eagles to new all time highs. By September 1987, the fed funds rate was as low as 6.75 percent. This is a drastic reduction in interest rates, as the easy money flowed so did the stock market.
Now under President Bill Clinton the fed funds rate was around the 3.0 percent level. The Federal Reserve soon started to raise interest rates into July 1995. At that time, the fed funds rate was at 5.75 percent. Then the Federal Reserve started to lower interest rates, and the stock markets began to climb once again. In 2008, the fed funds rate was as low as 4.75 percent. Once again, the central bank started to raise rates to 6.0 percent in 2000 and the stock markets made their final high before starting a new bear market.
Now, let;s fast forward to modern times. President Obama is now getting credit for a four year stock market rally. Remember, in March 2009 the Dow Jones Industrial Average was as low as 6470.0. Today, the DJIA is trading as high as 13,766, which is a new four year high. Please understand the Federal Reserve has held the fed funds rate at zero to a quarter percent since December 2008. There is also about $90 billion dollars a month worth of bond buying going on by the Federal Reserve.
So I believe it is safe to say that the president of the United States has very little to do with the economy and the stock market. The Federal Reserve has everything to do with the stock market. So the next time someone tells you that Bill Clinton and Ronald Reagan were great leaders you may just want to replace those names with Paul Volker, Alan Greenspan, and now Ben Bernanke.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.