Stocks didn’t appear happy with the election results, selling off sharply for the worst week in five months. For the week, the Dow dropped 2.1%, the S&P fell 2.4%, and the Nasdaq plunged 2.6%. Gold rose firmly on the likelihood of continued easy money policies, rising 3.4% on the week. Oil saw some large moves, closing the week with a modest gain of 1.4% to just over $86 a barrel. The foreign Brent crude, used in much of our gas here in the East, closed shy of $110.
Source: Yahoo Finance
Well, at least it’s over. That’s one of the few positives we took from the election. The market wasn’t happy, either, as stocks saw their worst day of the year. The Dow fell more than 300 points, or 2.4%, on Wednesday alone. Maybe that was an improvement, seeing that the market dropped over 5% the day after President Obama’s first victory.
Like many others, we didn’t think the market would see such strong moves on the election results. Perhaps more people than it appeared were looking for a Romney win.
The election did draw attention to several problems facing us in the near future. We think the foremost reason for the decline in stocks was the tax outlook.
With the reelection, it is virtually certain that taxes will rise next year, whether it is income, cap gains, dividends, or estate taxes, or new taxes related to the health care law. That gives investors a reason to sell now and take gains while taxes are lower. It is a primary reason why high-flying stocks like Apple were hit this week.
The reelection also meant a continuation of gridlock in government. This is a concern with the looming tax increases and spending cuts, commonly referred to as the “fiscal cliff” in the press.
We saw this week a desire amongst politicians to work together to avoid this cliff. However, the difference in approaches remains apparent as the rhetoric has not changed. Short-sighted politicians believe a simple rate hike on the wealthy will cure our fiscal ills (we saw the market drop immediately on Friday with similar remarks from the President).
However, a more comprehensive reform is needed. For the tax side of the argument, history has shown us time and again, raising tax rates actually results in lower revenue to the government. Reforms that promote growth have been proven to result in higher revenues. Hopefully any agreement will lean in this direction.
Regardless, we think even a temporary fix to buy time will be welcomed by the market. A fundamental, pro-growth reform would be even better.
Another consequence of the election is a continuation of the Fed’s easy-money and stimulative policies. While the market has risen with stimulus, it is a negative in the long run.
It is also another wrinkle that investment managers like us must consider for our portfolios. Figuring out fundamentals like the direction of corporate earnings and economic strength are difficult enough. Adding another layer of unpredictability with the economic central-planners at central banks makes investors even more reluctant to invest.
Lastly, the hope for any rollback of regulations has been eliminated. Whether it is costly rules from Dodd-Frank, the healthcare law, or even EPA regulations, these programs will create another headwind for the economy.
It wasn’t just the election that weighed on the market this week. Problems in Europe are back in the headlines.
Business activity and industrial production in the Euro zone has fallen sharply and estimates for the future have been revised lower. Particularly worrisome is that Germany, the workhorse of the region, is included in the negative outlook. There are few bright spots in the region and bad news is likely to persist.
Next Week
Next week looks to be much quieter than the previous weeks. The pace of corporate earnings has fallen off as the lackluster earnings season has wound down. There will be a few economic reports, including inflation on the producer and consumer level (PPI and CPI), as well as info on retail sales and industrial production.
The focus next week will likely continue be on information coming out of Europe, as well as talk on the fiscal cliff issues here at home.
Investment Strategy
We underestimated the reaction in the market to the election. At this time, it looks like the market is more focused on macro issues like the fiscal cliff. As mentioned above, if a fix is in the works, the market is likely to rally, but the reverse is also true.
Problems in Europe are another focus, which is a concern any time they are in the headlines.
As the market moves lower, it looks more and more oversold, meaning we think there is more room for the market to move higher. That said, there is no telling how the fiscal situation will work out, nor the Euro story. It might not hurt to nibble, but caution is warranted.
There is no change in the investments we favor at this time, though different sectors will benefit based on the election. We still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
Gold was reaffirmed as a favorite after the election. We will continue the easy money policies that have fueled its rise to this point. Continued money printing, bailouts, and stimulus around the globe will help in the long run. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
The election also helped the bond sector. Though Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), the trend is moving back that direction. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes have increased the attractiveness of these bonds.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Like many others, we didn’t think the market would see such strong moves on the election results. Perhaps more people than it appeared were looking for a Romney win.
The election did draw attention to several problems facing us in the near future. We think the foremost reason for the decline in stocks was the tax outlook.
With the reelection, it is virtually certain that taxes will rise next year, whether it is income, cap gains, dividends, or estate taxes, or new taxes related to the health care law. That gives investors a reason to sell now and take gains while taxes are lower. It is a primary reason why high-flying stocks like Apple were hit this week.
The reelection also meant a continuation of gridlock in government. This is a concern with the looming tax increases and spending cuts, commonly referred to as the “fiscal cliff” in the press.
We saw this week a desire amongst politicians to work together to avoid this cliff. However, the difference in approaches remains apparent as the rhetoric has not changed. Short-sighted politicians believe a simple rate hike on the wealthy will cure our fiscal ills (we saw the market drop immediately on Friday with similar remarks from the President).
However, a more comprehensive reform is needed. For the tax side of the argument, history has shown us time and again, raising tax rates actually results in lower revenue to the government. Reforms that promote growth have been proven to result in higher revenues. Hopefully any agreement will lean in this direction.
Regardless, we think even a temporary fix to buy time will be welcomed by the market. A fundamental, pro-growth reform would be even better.
Another consequence of the election is a continuation of the Fed’s easy-money and stimulative policies. While the market has risen with stimulus, it is a negative in the long run.
It is also another wrinkle that investment managers like us must consider for our portfolios. Figuring out fundamentals like the direction of corporate earnings and economic strength are difficult enough. Adding another layer of unpredictability with the economic central-planners at central banks makes investors even more reluctant to invest.
Lastly, the hope for any rollback of regulations has been eliminated. Whether it is costly rules from Dodd-Frank, the healthcare law, or even EPA regulations, these programs will create another headwind for the economy.
It wasn’t just the election that weighed on the market this week. Problems in Europe are back in the headlines.
Business activity and industrial production in the Euro zone has fallen sharply and estimates for the future have been revised lower. Particularly worrisome is that Germany, the workhorse of the region, is included in the negative outlook. There are few bright spots in the region and bad news is likely to persist.
Next Week
Next week looks to be much quieter than the previous weeks. The pace of corporate earnings has fallen off as the lackluster earnings season has wound down. There will be a few economic reports, including inflation on the producer and consumer level (PPI and CPI), as well as info on retail sales and industrial production.
The focus next week will likely continue be on information coming out of Europe, as well as talk on the fiscal cliff issues here at home.
Investment Strategy
We underestimated the reaction in the market to the election. At this time, it looks like the market is more focused on macro issues like the fiscal cliff. As mentioned above, if a fix is in the works, the market is likely to rally, but the reverse is also true.
Problems in Europe are another focus, which is a concern any time they are in the headlines.
As the market moves lower, it looks more and more oversold, meaning we think there is more room for the market to move higher. That said, there is no telling how the fiscal situation will work out, nor the Euro story. It might not hurt to nibble, but caution is warranted.
There is no change in the investments we favor at this time, though different sectors will benefit based on the election. We still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
Gold was reaffirmed as a favorite after the election. We will continue the easy money policies that have fueled its rise to this point. Continued money printing, bailouts, and stimulus around the globe will help in the long run. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
The election also helped the bond sector. Though Treasury bonds yields aren’t at their historic lows (where prices were near historic highs), the trend is moving back that direction. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes have increased the attractiveness of these bonds.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
