The presidential election finally came to pass on Tuesday. And regardless of political ideology, it provided two positive developments for investment markets.
First, the casting of ballots was completed without controversy with a clear winner determined by the end of Election Day. Such an outcome was not entirely certain with polls showing a dead heat between the two candidates heading into the vote. With all of the challenges facing the country including the looming fiscal cliff immediately at the end of the year, a protracted dispute like we experienced in 2000 would have introduced considerable risks to the outlook. Thus, having either candidate prevail decisively was a better outcome than having no winner determined at all.
Second, the election no longer represents an uncertainty for the markets now that it is completed. Leading up to the election, investors were left to prepare for two distinctly different policy outcomes depending on whether President Obama or Governor Romney won the election. But now that the election is completed, one of these scenarios has now been eliminated and investors can move forward with a higher degree of certainty about the policy outlook regardless of whether they liked the outcome or not.
So now that the election is behind us, it is worthwhile to survey the investment landscape between now and the end of the year.
The next major challenge facing investment markets is the U.S. fiscal cliff. In short, the fiscal cliff represents $100 billion in government spending cuts and $400 billion in effective tax increases that are set to take place on January 1, 2013. The $500 billion total represents 3.5% of U.S. GDP, so allowing the U.S. to roll off the fiscal cliff would essentially plunge the economy directly into recession. As a result, both the President and Congress have an incentive to negotiate a deal to at a minimum smooth some of these spending cuts and tax increases to avoid shocking the U.S. economy. How these negotiations unfold will have a meaningful effect on the markets in the coming weeks leading up to the end of the year.
So far, the stock market has struggled in the first few days since Election Day. Whether it was a response to the election results, concerns about the ongoing crisis in Europe or another factor altogether, stocks suffered their worst two day point decline of the year following Election Day, plunging by -51 points on the S&P 500 Index on Wednesday and Thursday. And they showed no signs of rebounding on Friday, gaining only +2 points on the S&P 500 to end the week. Overall, the stock market shed -3% in the three days following the election.
Despite this initially poor performance, stocks still have several factors in their favor at least in the near-term. First, November and December is seasonally the best two months of the year for stocks over history. Second, stocks are now technically oversold on a variety of readings and appear to have found support at its critical 200-day moving average. Third, the high yield bond market, which has been a reliable leading/coincident indicator to any stock market declines since the beginning of the financial crisis has effectively held steady with a relatively modest decline over the last few days. Fourth, the dismal third quarter earnings season is effectively over with more than 91% of companies in the S&P 500 having reported through Friday, which suggests that bad news from the corporate front is likely to die down at least for now. Finally, the money printing continues from U.S. Federal Reserve with $40 billion in open ended QE stimulus scheduled to flow into the financial system every month for the foreseeable future.
These are just some of the factors that support steady to higher stock prices at least over the next few weeks barring a full blown crisis outbreak in Europe or a collapse in U.S. fiscal cliff negotiations. But any allocations to stocks should be viewed with a short-term perspective, as meaningful risks continue to build over the medium-term to long-term that must be carefully evaluated at each step along the way.
Fortunately, a variety of other asset classes outside of stocks are performing well as would be expected in the current environment. Precious metals such as Gold and Silver both burst to the upside by +3% and +5%, respectively, since Election Day. Both provide inflation protection and represent stores of value that stand to benefit directly from an election outcome that implies that the aggressively accommodative monetary policy from the U.S. Federal Reserve is likely to remain in tact for the foreseeable future. Concerns over the economic outlook also provided support to the higher quality areas of the U.S. bond market such as U.S. Treasury Inflation Protected Securities (TIPS), Municipal Bonds and Build America Bonds. The strong performance across all of these categories helped neutralize the portfolio impact from sharp decline in the stock market over the last few days.
Looking ahead over the coming weeks between now and the end of the year, the priority remains focused on staying hedged in investment portfolios. This includes exposures to a broad range of asset classes including those mentioned above that provide protection to the downside but can participate equally to the upside if we experience another seasonally strong close to the year through the remainder of November and into December. And if the situation in Europe continues to grind and we begin to see signs of progress in fiscal cliff negotiations in the coming weeks, this may provide enough of a catalyst along with the steady flow of money streaming in from the Fed to spark such a rally before the year is out.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.