Obama is not market's puppet master
By Paul R. La Monica, November 8, 2012
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
The market plunged Wednesday and many on Wall Street were quick to point the finger at President Obama. The huge slide clearly must have been investors’ way of showing how disappointed they were that Mitt Romney did not win.
That’s overly simplistic.
Sure, a Romney victory would have likely been cheered. He was viewed by market strategists as the more market-friendly candidate.
“Profits are going to suffer because of a lack of confidence. There is a huge amount of cash on the sidelines waiting to be deployed and that’s not going to happen now,” said George Schwartz, president of Schwartz Investment Counsel Inc. and manager of the Ave Maria family of mutual funds in Bloomfield Hills, Mich. “The election was an opportunity to make some good changes on taxes and other things.”
That’s a valid point. I also think it’s fair to say that the pummeling of Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C), Morgan Stanley (MS) and other big banks Wednesday can be attributed to Obama’s re-election. Dodd-Frank is here to stay and that definitely could hurt Wall Street’s profits.
But stocks have been due for a big slump for awhile. Even after a down month in October, the market was still sitting on decent gains for the year.
And with the election now mercifully behind us, investors can once again focus on many of the challenges facing stocks. I think that’s a big reason why stocks were down a bit Thursday instead of enjoying a knee-jerk rebound.
Consider that futures were actually flattish in very early trading Wednesday. Initially, there was no Obama sell-off in the cards. But futures tanked after ECB president Mario Draghi made a speech in which he noted that the European debt crisis was starting to impact Germany. That set the tone for an ugly market open and the selling got worse as the day progressed.
That makes sense. Europe is a disaster. And Draghi would have said the same thing about the continent if Romney had won.
“Greece is still a problem. Spain and Italy are a problem. But investors were thinking at least we have strength in Germany. Now it appears that Germany has a cold,” said Matt Lifson, a senior foreign exchange trader and market analyst with Cambridge Mercantile Group in Princeton, N.J. Lifson said that he thinks only about 25% of Wednesday’s sell-off was really due to Obama’s re-election and the rest was about Europe.
But Europe isn’t the only issue. Concerns about China’s economy don’t help matters. As a result, investors are worried about weak profits. Even market phenom Apple (AAPL) is now in bear territory as investors realize that it is mortal. A challenging global economy will lead to more sluggish growth for all.
“With the election over, people are looking again at the inadequacies of earnings and the reality of the difficulties in Europe and the rest of the global economy,” said Daniel Alpert, a managing director with Westwood Capital in New York.
There’s also those looming tax hikes and massive spending cuts in the U.S at the end of the year. The fact that nothing has changed in Washington (Obama in the White House, elephants controlling the House and donkeys with the majority in the Senate) is the worst case scenario for investors. No party has a clear mandate to fix the budget and deficit quagmire.
But even if Romney had won, there would have been little reason to expect that the fiscal cliff could be resolved quickly and favorably unless Republicans also won more seats in the Senate. In other words, investors were likely to wake up to lingering uncertainty Wednesday no matter what the outcome was in the race for president.
“The market’s attention has to revert immediately to the fiscal cliff. That would have happened regardless of who won the election,” said David Joy, chief market strategist with Ameriprise Financial in Boston. “This market downturn could be a buying opportunity, but there’s no need for investors to be a hero just yet.”
Exactly. The rush into Treasury bonds Wednesday was another sign that nervous investors are more interested in supposedly safer assets.
“It’s like a bad Karate Kid movie. Risk on. Risk off. Risk on. Risk off,” said Lifson. “Right now, it’s risk off again.”
Investors are likely to be on pins and needles until the end of the year unless a fiscal cliff deal is reached. President Obama deserves some of the blame for that. But not all. It’s politics as usual that’s the problem. Not the fact that Obama beat Romney. And if Congress and the White House merely agree on a stopgap measure regarding taxes and spending cuts that doesn’t solve the budget woes for good, stocks are probably going to remain on a rocky path throughout 2013.
“Dangling, but not falling, off the cliff is a big fear. It would just prolong the inevitable,” said Matt Santini, a portfolio manager with CLS Investments in Omaha. “If there is only a temporary reprieve, the market would realize that is not a concrete change.”
Finally, I’d be remiss if I didn’t mention the role that central banks have played in helping to pump up stocks this year. QE3 from the Federal Reserve and a variety of bond buying programs from the European Central Bank have helped mask the weakness in the global economy. But this story is getting old. Investors looking ahead to 2013 may be slowly coming to grips with the fact that stocks can’t keep climbing solely due to low interest rates and loose monetary policy.
“People had been acting as if the market depended on who won the election. But there is now going to be a broad-based realization about how fake this rally has been,”said Jeffrey Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J. “Mario Draghi and Ben Bernanke have been the puppet masters behind this with all the liquidity they have supplied.”