The Election is Over! Now What?
For some time now, Lowe Wealth Advisors has expressed our view that conditions of uncertainty are not a friend of the equity markets. We have consistently said that once the status of uncertainty is removed from the picture, the direction of the markets could become clearer as well.
With President Obama’s win for a second term we have indeed seen one of the elements of uncertainty eliminated. The equity markets promptly responded with about a 2% decline (bear in mind that the markets were up about 1% the prior day).
Why did the markets react as they did? There are a number of potential contributing factors that we believe caused the sharp decline. These were:
Recognition that higher capital gains tax rates are very likely in 2013. Investors may have decided to start selling appreciated holdings and realizing gains at lower tax rates.
Investors were reacting to the fact that we essentially have a “status-quo” scenario in DC. Fears about gridlock and an unwillingness to work across the aisle could have fueled fears about the Fiscal Cliff given that Congress has not been able to make meaningful progress on this issue.
Concerns around Europe’s circumstances continue to percolate. The continued decline Thursday was likely a result of concerns related to Greece.
Businesses are communicating their concerns about anticipated higher tax environments and their reluctance to invest capital and resources toward hiring and growth. In fact many businesses, particularly in the financial sectors, are showing that further rounds of layoffs may be forthcoming.
Recognition that the election results are showing significant demographic shifts in the U.S. political landscape and investors are grappling with the possible implications for the long-term.
Looking at historical political data (Source: Ned Davis Research), it seems that in many cases an incumbent victory tends to be favorable for the equity markets in the short term. However, we are facing numerous headwinds and continued uncertainties, which means that drawing any conclusion from prior political environments isn’t meaningful.
At the present time, Lowe Wealth Advisors continues to hold optimistic views that Congress will act to provide a short-term solution to the Fiscal Cliff. Speaker Boehner’s remarks made on November 7 signaled a conciliatory tone and reflected a positive development in governmental processes. A resolution of the Fiscal Cliff could remove yet another level of uncertainty. The markets have the potential to respond favorably with this development.
We have said in prior remarks that we anticipated that the end of 2012 would likely be volatile and we are beginning to see that unfold. It is our opinion that investor pessimism may be at an excessive level today.
For a deeper analysis we would recommend that you click here to view the video from our recent annual client breakfast featuring a presentation by economist Anirban Basu.
In summary, we believe that a continuation of a cyclical uptrend is possible for now. But, fiscal headwinds in 2013 could cause challenges, and if we do go off the Fiscal Cliff a recession in 2013 is expected.
Lowe Wealth Advisors continues to work on behalf of our actively managed clients to develop diversified portfolios and strategies for the current environment. We will be in touch with our clients over the next several weeks to discuss any appropriate strategies based on the anticipated tax increases in 2013. Videos discussing specific aspects of the anticipated tax changes will be available in the next few days.
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This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.
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