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Kent Thune

Stocks Down After Election: Why? What's Next?

By November 7, 2012

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The Dow Jones fell by more than 300 points (approximately 2%) on Wednesday -- it's worst day for 2012 year-to-date.  Was it Obama's re-election that scared investors?  Not exactly; but that is part of the equation.  Here's what happened and what to expect going forward.

Fiscal Cliff and Germany Combine for Big Negative

The prediction markets had expected Obama to win the US presidential election Tuesday but it had given odds of roughly 60%, with 40% odds going to Mitt Romney.  With the "fiscal cliff" looming around the corner, investors were looking for some clue that gridlock in Washington could be unlocked, so to speak, and therefore the fiscal cliff could be averted.

Keep in mind here that the greatest damage done by the fiscal cliff would be uncertainty over its resolution.  In other words, the fear of falling off the cliff may be just as damaging as the cliff itself because the stock market is a discounting mechanism, which means it makes educated guesses about the future and prices that expectation into stocks today.  At the moment, investors have little confidence in Washington because, with Obama's re-election and the fundamental structure of Congress (Republican-controlled House, Democrat-controlled Senate), the nation faces a similar negative result as last year's "debt ceiling standoff."

Now back to prediction markets.  Although the 60% prediction of Obama's victory seems high, there were still 40% that expected defeat (and thus greater odds of avoiding the fiscal cliff), which helps explain why stocks dropped even though Obama was seen as winning. If Romney had won, investors would have assumed that the fiscal cliff might be avoided and stock prices may have risen.

In summary, most investors were not surprised by the election, however the expectations of a large segment of investors (40%) now view the near-future in a different and negative light.  Adding to the market's negative tone was news that Germany has begun to feel negative impact from Europe's debt crisis.

What Will Move Stocks Up or Down From Here

Logic is not always correct when analyzing what is often an emotion-driven machine.  However, an investor can make a reasonable assumption that stocks will move higher if the fiscal cliff is avoided and if there is some kind of news that indicates Europe's debt crisis is only "as bad as we once thought but not worse."  Therefore, expectations are everything, especially when uncertainty is at high levels.  If gridlock in Washington drives the market closer to the cliff, and with no end in sight, market conditions might deteriorate.

I don't support absolute market timing strategies but there is no doubt that this bull market for stocks is getting old and expectations for (and perhaps exposure to) stocks should be gradually declining as the bull gets older.  However, this does not mean a bear market has begun today.

As always, asset allocation and investment mix depends upon many factors, including time horizon and risk tolerance.  This article, as always, is for information purposes.

Comments
November 8, 2012 at 11:44 pm
(1) James Stankiewicz says:

Surely you are an idiot, the stock futures start to drop immediately after the election reuslts and continue to crash now close to 500 points you are nothing short of a communist with propaganda not recognizing the crash was due to anyone with a brain that liberal democrats and Obama are terrible for the USA economy

November 9, 2012 at 1:35 pm
(2) Alex R. says:

Surely name calling contributes neither to predictive accuracy nor. (On the assumption that your2cets worth has any impact) market stability.

November 11, 2012 at 11:40 pm
(3) Charles Hagedorn says:

Concerning comment #1, then what did the economic meltdown in 2008 say about W and his policies? That was a lot more than a 500 point drop. If comment 1 is correct, then any stock market increases will also be due to the Obama administration, including the fact that the current bull market has happened on his watch.

November 12, 2012 at 11:51 am
(4) Kent Thune says:

Not that Comment #1 deserves a response, I believe it may be useful for other readers to receive a bit more clarity on what was actually written in this article and what it actually means without political blinders:

Prediction markets, had the likelihood of a “winner” at 60% Obama, 40% Romney. The sell-off in stocks, according to traders following prediction markets was from that 40% residual doubt that Obama would be re-elected.

The markets have been “telling” us for several months that a Romney win might mean a short-term positive for the market because investors perceived it would mean a quicker, more favorable resolution to the fiscal cliff. Similarly, the markets rose after Romney’s first debate.

The problem (and the sell-off) stems from “business as usual,” which reflects the fact that there was no real political change (this includes Congress) on November 6, and that the fiscal cliff might not get resolved quickly or with acceptable results to that 40%.

Additionally, and as I included in the post here, negative news about Germany surfaced on November 7. The Eurozone debt crisis has been a negative drag on markets for several quarters.

Put simply, the large sell-off was largely due to a lack of confidence in Washington politics (both Democrat and Republican) as well as world economies.

Comments #2 and #3 summarize my final point: It is not prudent, nor accurate, to give any President full credit or blame for economic and market conditions. I wouldn’t give Obama “credit” for the incredible rise in stock prices since his inauguration (70% increase on the S&P 500) nor would I blame Bush for the worst recession in 70 years that punctuated the last year of his second term.

To misplace culpability is to perpetuate the problem.

November 12, 2012 at 8:10 pm
(5) John says:

Thank you for nice article! My opinions: We have 3 branches of government. Congress and the Supreme Court need to try to help our country also, with some simple agreements among all 3 branches. Also, the individual spending choices, of all Americans, have a lot to do with the economy. People need to help each other every day, not just when there is a natural disaster. We need simple “plain English” legislation, not just big complicated bills which take months or years to pass, or to be defeated. Thank you.

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