Vahan Janjigian, Ph.D., CFA | On January 28, 2013

It is difficult to point this out without sounding partisan, but U.S. stocks have been sinking ever since Election Day. The selling has been across the board. The Dow Jones Industrial Average and the S&P 500 Index are both down 5.1%. The NASDAQ Composite Index is down 5.5%. The Russell 2000, a small-cap index, is down 6.4%. Apple Inc., which had already suffered a large sell-off prior to the election, has given up another 7.9% since President Obama was reelected. Only the most die-hard Democrats (and left-leaning journalists) can fail to notice how poorly investors have greeted Obama’s second term.

The selling today was particularly disappointing. After all, stocks began the day on the upside. The futures markets were pointing strongly higher as investors cheered Cisco’s earnings, which came out after yesterday’s close. They also applauded Staples’ report, which was released before the open today. Both companies reported better-than-expected results and their stocks rallied strongly in pre-market trading. Unfortunately, things began to sour soon after the markets opened. The thinking is that investors are beginning to fear the prospect of higher tax rates next year. In order to minimize the tax burden, they are trying to realize gains before 2012 comes to an end.

Minutes before the president was to speak at a press conference at 1:30 pm today, stocks put in a bit of a rally. Investors were hoping to hear some conciliatory words about cutting a deal with Republicans and avoiding the dreaded fiscal cliff; but it was not to be. The selling took on steam soon after the president approached the podium and began his address. It quickly became clear that Obama views his reelection as a mandate to raise taxes on the rich. Investors sensed that this was not a man who seemed willing to compromise. By the end of the day, the Dow was almost 200 points lower.

How much lower can the markets go? That truly depends on the politicians. Each day brings us one step closer to disaster, yet I am holding my breath. I find it inconceivable that our elected officials would not cut a deal. It would be incredibly irresponsible of them not to. A failure to compromise will take both the economy and the stock market over the edge. My expectation is that a deal will be struck. However, for stocks to rally, it has to be a genuine deal. Increases in tax revenues must be met with spending cuts, and there has to be meaningful reform to the tax code. There is no question that the election results strengthen President Obama’s hand, but he won’t like what will happen to the markets if investors become convinced that he is simply riding roughshod over the Republicans.

Vahan Janjigian, Ph.D., CFA

Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.

Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.

Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).