The Presidential Election Aftermath
The people have spoken, and it is going to be four more years for President Obama. The Congress remains divided, with Democrats in control of the Senate and Republicans in control of the House.
As we’ve seen in today’s trading, the markets don’t seem too pleased with the outcome of last night’s vote. Not that the reelection of the president is responsible for all of the selling, but certainly it doesn’t help the bullish cause. One big reason for the selling is that with the uncertainty of who will be in power in Washington out of the way, investors and traders now are forced to look at the fundamentals in the economy, as well as the headwinds going forward, in making their decisions.
Now that we know who is in charge in Washington, we can turn to the realities that the leadership faces and those realities are both harsh and scary.
The biggest immediate headwind is the so-called “fiscal cliff,” a toxic cocktail of budget cuts to critical areas such as defense, combined with the end of the Bush-era tax cuts. The combined drag on the country’s gross domestic product (GDP) could be huge, and if the president and Congress fail to reach an agreement by January 1, 2013, then we all could be in a world of hurt.
Given the divided government that we elected last night, I suspect that the resolution of the fiscal cliff is further away than it was just yesterday.
As for the markets, we saw big selling in the major averages on Wednesday. Midway through the trading session, the S&P 500 was down more than 2%, and trading below the psychologically and technically significant 1,400 level.
Of course, the selling in domestic stocks hasn’t been just a phenomenon of today. In late October, the S&P 500 fell below its 50-day moving average. If things continue to fall, we will be very close to seeing the market break below the long-term, 200-day moving average — a very bearish signal for stocks going forward.
And it’s not just the S&P 500 that’s sold off hard of late. Some of the top stocks in the best sectors have fallen as well, including one of the market’s traditionally strongest stocks, Apple (AAPL). The chart below of the personal technology giant tells the tale of a company whose shares have plunged under heavy selling pressure since vaulting to its all-time high in September.
As you can see, Apple shares have broken down below the 200-day moving average, and this situation is not a good sign for the company, or the markets at large, going forward. Moreover, the stock is now officially in bear market territory, having declined some 20% off of its most recent high.
The bottom line here is that when leading companies in leading sectors get hit with a selling wave, it doesn’t augur well for companies with far less earnings prowess.
To be certain, it’s a precarious time in the markets. That means it’s essential for you to approach any investment with extreme caution. Make sure that if you have gains in the market right now that you act to protect those gains.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
