Stock selloff ahead?

[FarmerD]

Leaving one's personal politics aside, does the election results portend a stock selloff?  Suppose there has been a Republican landslide (Romney wins, Republicans take Senate).  To me, the stock markets would have breathed a sigh of relief since Obamacare implementation wouldn't occur, Bush's income tax cuts wouldn't expire, cap gains/dividend taxes wouldn't increase, and there would be no debt limit standoff.  But with the status quo maintained (Obama as President, a Republican House and Democrat senate) there seems to be a lot of worry about how the impending brinksmanship will turn out. 

Under this wall of worry, I don't see how stock markets can rise and a decline, possibly a sharp decline, is probable.  We are possibly seeing this reflected in the markets today, one day after the election. Since we're in the PP, I feel relatively safe, but people with a stock heavy allocation may get bit.

Curious what everone else here thinks. 

[Pointedstick]

I think you're right. Nice to see treasuries roaring to life today! I'm up a bit so far.

[melveyr]

I think president Obama will have a tougher time resolving the fiscal cliff than Mr. Romney would have. The Republicans in congress have incredible political discipline and are tougher to negotiate with than the democrats.

I think LTT will continue to be the best hedge for the next year. I think the private sector has a lot more deleveraging to do and the wrong fiscal response could push us into a depression.

[moda0306]

I really think this is a one-off adjustment by the market due to what is sure to be a higher likelihood of higher taxes and regulations on corporations in the near-term.  If the market really hated Obama so much, it wouldn't have skyrocketed the last nearly 4 years.

I think the only thing that can stop a continued economic recovery over the next four years (as well as decent stock market performance), barring some ridiculous new legislation, is if we "balance the budget" or anything close to it.  For all the things our government could do to make the lives of honest hardworking business-owners easier through tax-simplification and reducing complex healthcare regulations, I see the main, overriding problem in the short-to-mid-term as a lack of adequate demand to warrant private sector investment and mass-hiring. 

While I'm hardly impressed with the earnings yield of the stock market (P/E ratio flipped), compared to most fixed-income options it's not too shabby, and I simply don't think we will see 8%-10% earnings yield while 10-year t-bonds are less than 2%, unless the sky is falling... and you all know I don't think rates are rising any time soon.... so I think we'll se DOW 16,000 by the end of Obama's second term unless they raise taxes and/or cut spending in a 1937 replay.  Anything else stupid like the fed raising rates too early (very unlikely IMO) or defaulting on debt on purpose would obviously also cause a crash.  Oh, and if in December, the world ends, I predict even the PP won't save you!

[MediumTex]

I think that people overestimate the effect elections have on markets, especially the reelection of the incumbent.

To me, the long term demographic and deleveraging trends will have have a  MUCH larger impact on the stock market than the inhabitant of the White House (especially since the contest was basically a liberal Republican vs. a liberal Democrat).

Thinking that the inhabitant of the White House determines what will happen with the stock market is sort of like trying to determine whether a plane will crash based upon the Zodiac sign of the pilot--you can construct all sorts of interesting predictive models, but at some point you realize there really isn't any rhyme or reason to it.

The stock market has done great under every President since Carter, with the exception of Bush II, when it was down three out of his eight years in office, and averaged 1.9% CAGR over his two terms. 

In Obama's first four years in office, the stock market has been up each year of his Presidency, including 14% YTD in 2012 with an average CAGR of 15.2% over the 2008-2012 period.

What does all that add up to?  Not much, but I think that it shows that the market is sort of talking out of both sides of its mouth--when we had 8 years of a "business friendly" Republican tax-cutting President the stock market went nowhere for almost a decade, while 4 years of the "socialist" Obama has seen pretty solid and consistent returns that are above the historical mean for stocks.

The U.S. political process is designed to spit out these bland middle-of-the-road politicians that half the people still manage to hate.  Unless you are a wrestling or roller derby fan who likes theater, manufactured drama and simulated competition, the best advice is to probably ignore all of this stuff when it comes to predicting their effects on your investments.

[MediumTex]

Personally, I like gridlock, and I think that the market does too (no matter what anyone says).

[FarmerD]

Personally, I like gridlock, and I think that the market does too (no matter what anyone says).

Generally that's true.  However, in this case, gridlock means huge uncertainty for businesses.  It's hard to play a game if you don't know what rules the referees will enforce.  With US growth as anemic as it is now, tax increases, increased Obamacare costs, and immediate budget cuts may well toss us into recession. 

In most gridlock situations, we'd see politicians compromise and work out a deal where each side gets something.  If neither side wants to compromise, it will come down to brinkmanship.  Personally I don't like the idea of politicians being the centerpiece of economic news.

[MediumTex]

Personally, I like gridlock, and I think that the market does too (no matter what anyone says).

Generally that's true.  However, in this case, gridlock means huge uncertainty for businesses.  It's hard to play a game if you don't know what rules the referees will enforce.  With US growth as anemic as it is now, tax increases, increased Obamacare costs, and immediate budget cuts may well toss us into recession. 

In most gridlock situations, we'd see politicians compromise and work out a deal where each side gets something.  If neither side wants to compromise, it will come down to brinkmanship.  Personally I don't like the idea of politicians being the centerpiece of economic news.

You would never know about that angst from looking at a graph of what has actually been happening in the economy in real terms.

It looks to me like when you remove the 2008 panic and the 2007-2009 recession, the economy has been expanding at about the same rate for about the last 15 years under three different presidents.  U.S. politics appears to just be market noise, contrary to the stories the media tells.

[moda0306]

Personally, I like gridlock, and I think that the market does too (no matter what anyone says).

Generally that's true.  However, in this case, gridlock means huge uncertainty for businesses.  It's hard to play a game if you don't know what rules the referees will enforce.  With US growth as anemic as it is now, tax increases, increased Obamacare costs, and immediate budget cuts may well toss us into recession. 

In most gridlock situations, we'd see politicians compromise and work out a deal where each side gets something.  If neither side wants to compromise, it will come down to brinkmanship.  Personally I don't like the idea of politicians being the centerpiece of economic news.

In a strong recession, isn't uncertainty about taxes or regulation far secondary to the uncertainty about the fundamental underlying driver of any business.... Demand for your Product/Service?

I fully understand businesses may be hesitant in uncertain regulatory environments or if they can't accurately predict their tax expense over the next decade for Project X or Project Y, but isn't that almost irrelevant in the face of inadequate demand?  For instance, if I own a factory that's under capacity by 10% and I'm uncertain about future revenues, I really don't need to do the math of how much taxes are or regulatory compliance expenses are to figure whether I should invest in a new factory addition?  In fact, both could disappear tomorrow, and I'd still be faced with inadequate demand. Yes, some people who have more improved balance sheets will spend money they wouldn't have, but that's literally the only source of increased demand you'll have in the short-to-mid term.

[RuralEngineer]

I view the stock selloff as a correction to where we should be, if you assume the stock market should reflect the general economy.  From my point of view, the economic "recovery" has been pathetically weak.

Obama isn't going to make the economy crash.  He'll just slow our growth down.  Some sectors will reap huge benefits from his administration's largess ("green" energy and health care).  Others will be beaten into the ground (coal, potentially Petroleum related companies if he decides to kill fracking).

[moda0306]

RuralEngineer,

What do you think could have significantly improved the recovery?

[RuralEngineer]

I don't believe the Government can take action to significantly improve the economy.  They can certainly take action to its detriment though.

Getting a long term tax deal, even one that increased taxes, along with getting rid of Obamacare would have allowed a more robust recovery, in my opinion.  The inefficient propping up of green energy and relaxing the war on efficient energy sources (coal, oil, natural gas) would have helped also.  I'm not an economist, but I can see what the effect of Administration policies have been on my company and, to a lesser extent, the rest of the economy.

Basically I'm a free market guy (although not a strict purist).

[Pointedstick]

Some sectors will reap huge benefits from his administration's largess ("green" energy and health care).

Looks like health care companies have actually lagged the broad market since Obama's been in power: