Millions celebrated the 44th President's inauguration, but the euphoria didn't rub off on Wall Street. Here's why. By Jeffrey R. Kosnett, Senior Editor January 23, 2009 Nearly two million people celebrate Barack Obama's inauguration in person, and billions more across the globe watch on TV during one of the most extraordinary days in U.S. history. Meanwhile, a relative handful of stock traders throw a tantrum -- or maybe a pity party -- and contribute to the biggest Inauguration Day selloff ever. The next day, the markets snap back, but two days later the losses resume. On January 23, the final day of inauguration week, the indexes meander and finish mixed. Total it up and the U.S. market is already down 8% in 2009 -- about two bad days away from sinking below its November 20 low. What gives? Maybe the week's unpromising start represented a final opportunity for ticked-off investors to give George W. Bush and his unpopular government a final kick in the rear. But Obama's ascension to the presidency at noon on January 20 did little to dispel the misery on Wall Street, and by the end of the day, the major indexes were down 4% or more. A drop of that magnitude typically produces a lot of media hand-wringing. On this day, though, the nation's newspapers, TV networks and Web portals preferred to focus on the euphoria on the National Mall in Washington, D.C., rather than the gloom on Wall Street. Advertisement Most financial advisers see no reason why stock indexes would track presidential approval ratings. The market is clearly focusing on other matters. "The economic news will be frightening the next few months," says Gregg Fisher, president of Gerstein, Fisher & Associates, a New York City investment advisory firm. The current news is frightening enough. For starters, there's the plight of the nation's banks. Their balance sheets wrecked by gobs of devalued mortgage securities, many more banks may need government assistance to remain afloat. Investors are becoming increasingly worried that some banks may be nationalized -- that is, taken over by Uncle Sam-a development that would likely wipe out most shareholder equity. Even if banks manage to remain independent, they may be forced to cut dividends further, putting additional pressure on share prices. You may find trading opportunities in Citibank (symbol C) at a bit more than $3, Bank of America (BAC) at $6 and Wells Fargo (WFC) at $16 if Obama's economic team persuades what's left of Wall Street that the administration won't seek to take over the banks. But even if the shares of these major banks recover a bit, you're unlikely to see the Dow Jones industrial average at 10,000 or Standard & Poor's 500-stock index at 1,000 this year. General Electric, American Express, oil companies and retailers are caught in the same economic quicksand as the banks are. Sure, IBM issued good numbers on January 21, but the next day Microsoft erased any confidence that had crept into the tech sector by releasing disappointing results and announcing thousands of layoffs, and stocks sank. There simply aren't enough points of light among blue chips -- or anywhere else -- to sustain a broad stock-market rally. Advertisement Investor attitudes also impede a rally. People feel deflated, bordering on uninterested. David Speck, an adviser with Wachovia Securities in Alexandria, Va., says that although this is a good time to invest because stocks are down, he has to spend a lot of time giving his clients "therapy" rather than portfolio advice. Expectations are so low for stocks, he says, that it's unlikely investors will jump back into the market, as they did after big setbacks in 1982 and 2003. Another camp holds that investors have lost their enthusiasm because the rally after Obama's election has already fizzled. Fisher says the 20% advance from late November through the end of 2008 priced in the excitement of Inauguration Day and that neither that gain nor the subsequent January retreat is particularly significant -- just the normal comings and goings of a trendless market. Expectations are so low that even the mutual fund business is hunkering down. Instead of promoting their managers' ability to recover their clients' losses, fund bosses are rethinking the premise that able managers add value. Putnam has just created a series of "absolute return" funds, which are designed to provide annual returns that are precisely one, three, five or seven percentage points more than what Treasury bills offer. If the funds work as advertised, says Putnam chief executive Robert Reynolds, they will make those anticipated returns over a three-year period no matter how positive or challenging the markets. The most aggressive fund is Putnam Absolute Return 700. Because Treasury bills essentially yield nothing nowadays, this fund presently aims to return 7%. Advertisement It will own aggressive stocks, foreign investments, real estate investment trusts and the like -- stuff that could easily gain 25% or better in a bull market. Meanwhile, you can get close to the taxable equivalent of 7% by buying investment-grade municipal bonds. You can find more about the line of funds at www.putnam.com. Reynolds, a former Fidelity executive, says people have lost interest in relative returns. No wonder. It's hard to get excited about beating the market by five percentage points when the S&P 500 loses 37%, as it did last year. Instead, investors want an assured gain, such as what they can get from a certificate of deposit. Reynolds predicts that absolute-return funds will catch on big-time in 2009 and 2010 and that other companies will come out with their own versions. If so, the hottest new fund idea will be something that often pays less than a CD and charges annual expenses of 1% to 2%, but carries no deposit insurance and no guarantees. This isn't exactly a concept born from confidence. Meanwhile, the Obama administration is under pressure to recharge the economy -- and sooner rather than later. Its next moves, which will likely include a proposal to spend money on creating temporary jobs or offering mortgage relief, will help consumers repay loans and buy gas and groceries. Advertisement This is hardly the fuel to fire up the stock market -- and it's not intended to be. America will be a happier nation for the foreseeable future because there's always a honeymoon when a new president assumes office. But it's premature to think that the cheers in the streets of the capital will spread to the capital markets anytime soon.