Stop Posturing and Cut a Deal Now!
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.