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VERSACE: Elections over, but markets’ uncertainty isn’t
It's over. The 2012 presidential election that is. After months of campaigning, divisive ads, robocalls and, of course, debates, we now know that Barack Obama will be president for the next four years.
We also know that the House and the Senate remain unchanged. All in all, it appears that at least for the next two years, the players remain the same as they have been in the past few years. All it took was $2 billion, and that was just for the two presidential candidates.
Less than 12 hours after the electoral votes were tallied, the conversation shifted toward the key issues that we as a nation need to deal with in the weeks and months ahead. The fiscal cliff. Tax reform. Government spending. Job creation.
In the mind's eye of the stock market that means more than a fair amount of uncertainty remains. As most, if not all, investors recognize, nothing prompts stock-market anxiety and volatility more than uncertainty. The recipe of items mentioned above that need to be dealt with appear to have given the stock market a quick case of winner's remorse. The day after Election Day, all of the major stock market indices fell sharply lower, with the Dow Jones industrial average falling more than 350 points at session lows to close well below the 13,000 line. The Standard & Poor's 500 index, my preferred market index because of the wider breadth of companies that compose it fell 2.4 percent, and the Nasdaq composite index dropped 2.5 percent.
That laundry list of issues is sizable enough on its own, but there's more. As some celebrated "four more years," we learned the economic picture in Europe continues to sour. The morning after Election Day 2012, the European Commission cut its outlook for the eurozone economy for both 2012 and 2013 owing to continued weak demand and high unemployment. The autumn forecast adjusted down the commission's 2012 economic view, and it now expects the eurozone economy to shrink 0.4 percent, slightly worse than the 0.3 percent contraction forecasted earlier this year.
Turning to the 2013 outlook, the European Commission slashed growth expectations for the 17-nation economy to just 0.1 percent, down from the 1 percent level of growth it projected earlier this year. In other words, the eurozone economy is now expected to look pretty much the way it has this year. When does the European Commission expect its economy to return to growth? In 2014 and at just a 1.4 percent rate, the same level the region had in 2011 and spelling at least four consecutive years of subpar growth.
Taken together, these factors equate to more uncertainty ahead. That means that absent a bipartisan deal – even a short-term one – to avert the fiscal cliff, the stock market has likely seen its highs for 2012. Even if we eventually get a deal, odds are as we inch closer to the deadline, companies will hope for the best, but plan for the worst. Forecasts will be adjusted, hiring plans likely suspended and job cuts reviewed as the fiscal cliff and sequestration lead to economic contraction in early 2013.
Normally, stocks with high dividends would be viewed as a safe haven, particularly those paid by those companies that have a more defensive business model. But as it stands today, the fiscal cliff would change tax rates on capital gains and qualifying dividends. Top capital-gains rate for most investors will be 20 percent, and dividends will be taxed as ordinary income, meaning the top rate could be 39.6 percent.
For those hoping for an end to stock market volatility and uncertainty once Election Day 2012 came and went, think again.
• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter at @_ChrisVersace. At the time of publication, Mr. Versace had no positions in any companies mentioned in this column; however, positions can change.
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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