Post-Election, the Equity Market Sell-off and the Fiscal Cliff
First, I’d like to recognize Veterans Day yesterday. Its origin goes back to November of 1919. This is when President Woodrow Wilson proclaimed November 11th as the first commemoration of Armistice Day with the following words:
“To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…”
As it was so aptly put today by a friend, we’d never have a 4th of July if it were not for veterans. Everyone here at Monument Wealth Management recognizes the sacrifices of our Veterans. Why the market is open today remains a mystery to me.
Second, happy birthday to my fellow Marines. Not bad for 237 years old – we continue to do it right. Semper Fidelis.
Here are the returns for the week – more commentary below.
The Election and Blah Blah Blah…
The election is now over and the certainty of the uncertainty is now certain.
I think.
First and foremost, let’s acknowledge that the equity markets are still displaying decent gains for the year. While last week undermined some confidence on Wall Street due to anxiety over the potential resolution of the Fiscal Cliff, Europe was the primary catalyst for last week’s sell-off.
For the first time, European Central Bank President, Mario Draghi, stated that the trouble in the euro-zone is starting to hurt Germany. So after the weaker opening on Wednesday, which was due to the election results (the market priced in a Romney victory), the wave of selling that ensued was tied primarily to that statement and the subsequent worry.
OK, so NOW WHAT?
So while the Republican Party works on answering the question “Why does everyone hate us?” Wall Street has started focusing on (cue the scary music) the Fiscal Cliff and the possibility that $600 billion in fiscal stimulus might be pulled out of the economy starting on January 1st. See last week’s blog on some of the possible paths.
Congressional leaders and the President are faced not only with the task of how to avoid the fiscal cliff, but MOST IMPORTANTLY how to craft a plausible strategy that fixes the nation’s finances.
As of today, both sides offered up an obligatory olive branch, but differences remain.
House Speaker Boehner said he is against raising tax rates on anyone, but acknowledged he is open to higher revenues in the context of tax reform (meaning cut tax rates but eliminate and reduce deductions).
President Obama also said he is open to changes in entitlements, but stipulated that those earning above $250,000 pay more in taxes. However, he did not demand that Congress raise tax rates for the wealthiest taxpayers, which could open the door to a compromise. Said differently, he may be considering the idea of limiting deductions for the highest earners and not an outright increase in tax rates to the pre-2001 levels.
Here’s the problem. All this talk of compromise is great, but the two parties still must come up with a plan that avoids the Fiscal Cliff and the consequences that are sure to follow. Tick tock…
Sectors Since the Election
Thanks to Bespoke Investment Group for the chart below. It shows the sectors that got hammered over the three days following the election – which by the way was the BIGGEST three day decline in a long time. Is anyone shocked that Energy and Financials took the biggest hit?
And Finally – Earnings
Lost in the news of Sandy and the Election is the fact that we are still in the middle of 3rd quarter earnings season. 59.7% of the companies reporting so far have beaten earnings. Not great. And worse than that are the reported revenue numbers – only 47.8% of companies reporting beat their revenue (sales) estimates.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values. The 2, 10 and 30 year Treasury is simply the yield at the close of the day.
(1) West Texas Intermediate crude spot price is as of end of week.
(2) London Bullion Market Association; gold fixing pricing at 3 p.m. London time.
David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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