The Day Ahead: The Aftermath

 | Nov 07, 2012 | 8:45 AM EST  | Comments
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The sights and sounds of an Election Day are like no other. There is the trademarked sound effect before a winner is announced on CNN, designed to build the intrigue. Supporters of the respective candidates emerge in various outlets to keep the faith, only to lose credibility and stamina as the winners are separated from the losers. Then there's that fresh face to the scene, Twitter, which people utilized as a sentiment gauge this time around.

In the end, I am left reflecting deeply on an interesting night. I have learned about human emotions and how people view the political process -- and, sadly, I've witnessed an inability to draw actionable investing conclusions from an event that has been well-documented since the year began. Where was the preparation? In fact, I am flat-out wondering if the would-be average investor is left permanently wearing concrete shoes on the sidelines after years of being burned -- and whether people chilling with their 401ks have any desire to directly enter the stock market. What I'm feeling right now, the day after, is strange: It pertains to the investing process overall, and that indeed extends to my early-inning views regarding the election's outcome.

Early on, a couple of consensus opinions appear to have emerged:

Stock futures rebounded because of Obama Administration continuity: This is a weak explanation to holding or buying stocks. You do not want to be offering cash to bid up price-to-earnings multiples on relief that a lack of change is a good thing. Operate under this logic at your own peril -- the "continuity on" trade will deflate more quickly than a dumped boyfriend's ego.

Stock futures are reserved because of election certainty: This is not as weak a reason to hold or buy stocks. The certainty of knowing who the president is, along with the occupants of the House and Senate, can indeed aid in drawing conclusions on future policy decisions that immediately impact investment decisions.

However, here is the rub: We've heard about business and investor uncertainty for most of 2012, and this has not been vaporized post-election. In fact, uncertainty in the business community may have increased, given our lack of clarity on how President Obama will govern. That feeds in to investor uncertainty. There is no reason to expect a Clinton-esque shift to the center by Obama. (Does he embrace the whole "legacy term" thing? I truly am unsure.) So that leaves full exposure to the damaging effects of the fiscal cliff and, with that, continued cautiousness regarding planning for capital expenditures among businesses. Also, restructuring remains the new norm of doing business in a slow-growth U.S./world.

Aftermath Questions

Will the Obama victory harm the trend of stronger-than-expected U.S. data in November?

I venture that the trend is likely at risk as "fiscal cliff" talk dominates, since this will potentially trigger new business adjustments by companies. Remember, sentiment on the fiscal cliff's harmful endgame leads over its actual arrival, and the moment is upon us to begin pricing in this sucker. Upside risk: Grand bargain talk gains traction. However, this seems to be a remote probability in a polarized status-quo Congress and uncertainty on whether a "New Obama" will emerge.

We've seen positive signs in industrial-survey new orders, and within industrial companies at the end of the third quarter. With election certainty, but no policy certainty, are these likely to be sustained in the fourth quarter?

There is risk here, as well, given the aforementioned negative fiscal-cliff feedback loop.

Is the market psychologically prepared for surprise factors unrelated to the bigger chunks of fiscal cliff?

Again, we're seeing a litany of risks at play. Allow me to illustrate by using a couple exit-poll takeaways. First, according to CNN, voters harbored minimal concerns on the prospect of higher taxes; let's see that hold true when the payroll tax goes bye-bye and the capital-gains tax heads higher.

Second, more voters expressed that they were either in the same financial shape as they were four years ago, or worse off. How this reads is that economic growth remains in a tight range, provided that the job market does not begin to self-sustain at 250,000 gains a month. In a tight-range economy, the gross domestic product estimates being discussed for the second half of 2013 -- 4% growth -- are so out of reach it's laughable. Risks are weighed to the downside in the near-term.

The attack plan, you ask? Well I, for one, am moving back to being short-term negative on stocks after I survived with an optimistic stance following the October employment report. Explanations include the following.

● It's difficult to imagine that money will aggressively flow into a market that now has to contend with significant headline risk from a U.S. economy that had been improving, and offsetting Europe. Pardon me if I have debt-ceiling flashbacks.

● The election outcome, from president to congressional, offers no confidence in fourth-quarter earnings being materially stronger vs. the third quarter. If anything, the risk is skewed to the opposite.

I think a valid course of action would be buying protection to this volatility by going long SPDR Gold Shares (GLD). The single thesis I see that has staying power would be a dollar-debasement policy from a Fed led by Ben Bernanke (or someone like him being appointed). That would benefit hard assets.

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