We Are Only As Strong As We Feel

Is it just me or do we all seem more pessimistic than usual these days?  The optimism over the economy back in the early summer, somewhat reinvigorated by the optimistic tones of the two Presidential conventions, now seems to be giving in to a dark and mean time.  Granted, we are amidst an emotional crescendo in the final weeks of a contentious and dirty political race.  But what will be the ultimate cost?  Will optimism return after the election?  If not, what of the economy?

If we assume our freedom is assured, (that assurance is somewhat diminished post 9/11) it is our economy that drives it all.  Our economy pays for our strong military.  Our economy makes the dollar the worlds’ currency.  Quite simply, our economy leads the worlds’ economies.

I am reminded of a time in history when our outlook was bleak indeed.  During the late 1970’s Vietnam was a “mess,” the Soviet Union continued to negatively exert its global influence, and our economy was on the floor with lack of productivity and very high inflation.  Lost in all of the malaise was our misunderstanding of the pervasiveness and strength of Islamic fundamentalism.  We missed the boat for decades until we were shocked by one terrifying and humiliating event.  On November 4, 1979, Iranian militants stormed the United States Embassy in Tehran,Iranand took approximately seventy Americans captive and held them for 444 days.  According to President Jimmy Carter’s Library and Museum website the following view was held by the President:

“President Carter committed himself to the safe return of the hostages while protecting America’s interests and prestige. He pursued a policy of restraint that put a higher value on the lives of the hostages than on American retaliatory power or protecting his own political future.  The toll of patient diplomacy was great, but President Carter’s actions brought freedom for the hostages with America’s honor preserved.”

The website http://www.jimmycarterlibrary.org/documents/hostages.phtml provides a good, but politically biased, recounting of the facts of the time if you wish to refresh your memory or learn more of those events.

One of the important lessons of the time is highlighted in the quote, but perhaps lost on history; “the toll of patient diplomacy was great.”  The toll was indeed great.  The most powerful nation on earth was held hostage for one and a quarter years.  Dictators throughout the world were emboldened to take more dramatic actions. San Salvadorwas in uprising.  In September of that yearIraninvadedIraq.  The Soviet Union invadedAfghanistanin December of 1979.  The Olympians of 61 countries saw their dreams shattered as their host countries boycotted the 1980 Olympic Games inMoscowin protest of the Soviet invasion. France,Great Britain,Italy, andSwedendid not join the boycott.  Chrysler was near bankruptcy and required a Federal bailout.  American’s pessimism and even shame was dangerously high.

From the perspective of business, sentiment is vitally important.  When moods are bleak, businessmen do not invest or hire.  The best way to measure the mood of business is Gross Domestic Product.  During 1980, a year of American pessimism, GDP performed horribly falling 7.8% in the second quarter and .7% in the third.  But by the end of 1980 a new optimism was taking hold in this country under a new bold and straight-talking Ronald Reagan.  By the final quarter of 1980 GDP surged ahead by 7.6%.  With the freeing of the American hostages in January of 1981 the first quarter grew an astonishing 8.4%.

As we now know from history, the pent-up creativity and optimism of the American people was unleashed to generate the greatest bull market in history.  The power of corporate mood on the direction of an economy cannot be understated.  For that matter, neither can government policy.  There are distinct differences between President George Bush and Senator John Kerry.  But the election outcome and the resulting new policies remain to be seen.  Their policies may not significantly affect the markets near-term.  After all, there are certain realities that don’t disappear on November 3rd such as; the continuing war inIraq, the deficit, the high cost oil, and the likelihood of a gridlocked Congress.

What bears very close scrutiny over the coming months is the country’s mood.  Will the unrelenting drone of negative political rhetoric and reporting grip a larger percentage of consumers and business managers thereby stalling the economy’s growth?  The economic forces just mentioned have no doubt muted the strength of the recovery so far.  But our future will in large part be a function of how good we feel.  That will be the first and significant challenge for our President as decided (hopefully) on November 2.