The U.S. presidential election is over now, and whatever uncertainty the process engendered in markets bent on finding things to worry about has been replaced by new anxiety about whether the so-called fiscal cliff could derail the fragile economic recovery.
“In the markets, we always have to find something to worry about,” a hedge fund manager, who spoke to IndexUniverse on condition of anonymity, said. “And, as soon as the election was out of the way, it became a competition between Europe and the fiscal cliff, and we went right to the fiscal cliff.”
Indeed, a gold market that was revived in the past few days on views that President Obama’s re-election meant the Federal Reserve’s easy-money policies would continue took a backseat to concerns that the toxic environment in Washington, D.C., might mean that Congress won’t find a way to extend Bush and Obama tax cuts to help support near-term economic growth.
The Dow Jones industrial average slipped more than 300 points right off the bat, and ended more than 2.3 percent lower, while gold prices started marginally lower and traded in the red most of the day just to close marginally higher. Funds like the $75 billion SPDR Gold Shares (GLD) traded lower most of the day. The Dow closed 312.95 points lower, and GLD ended the session 0.05 percent higher at $166.49 a share.
The selling was also about concerns that Greece may have more difficulty meeting its debt obligations, and came a day before a crucial meeting of eurozone leaders. If the past is any guide, the slow road out of a debt-induced crisis will continue, and probably in fits and starts, but that doesn’t mean investors aren’t going to worry along the way.
Some of Wednesday’s sharp move was also about the triggering of program-trading algorithms rather than an imminent possibility that the market could completely fall apart as it did in September 2008 when the U.S. House of Representatives first rejected the bailout package for banks.
There was a lot more leverage in the system then than now, so the potential for wholesale panic-selling is all but missing, even if Congress dithers before tackling the fiscal cliff.
“They’ll find a way to kick the can down the road. It won’t be perfect, but they’ll get something done,” the hedge fund manager said about the “fiscal cliff,” saying that while legislators may kick and scream along the way, they will address it in time and without a 2008-like draconian turn of events.
He also argued that despite gridlock in Washington, Democrats are now grasping that entitlements will have to be trimmed, and Republicans are becoming open to the idea that revenues have to go up in the form of higher taxes. That’s encouraging for the restoration of long-term U.S. fiscal health, he said.
Even so, there’s plenty of anxiety to go around.
But if markets and the economy dodge fiscal cliff and eurozone bullets, the question of how the market views another four years of the Obama administration comes back into sharper focus, and with it, so does a bit of anxiety.
QE Begets Gold Bulls
As far as that goes, traders and analysts seemed to agree that gold remained the safe haven of choice, even if Wednesday’s price action was on the downside.
Much of the bullish thinking surrounding precious metals centers around views that another four years of the Obama administration would likely mean more loose monetary policies that would weaken the dollar and cause assets like gold to increase in price.
“Since Obama is a Bernanke supporter, presumably these extremely loose monetary policies will continue, and that’s supportive for gold,” Hard Assets Investor Analyst Sumit Roy said.
That sentiment was echoed in the ETF trading traffic, where buying and selling of securities such as the $72.5 billion SPDR Gold Shares (GLD) were reflecting concerns about the monetary policy outlook.
“Yesterday we saw a little bit of a retreat for GLD on the possibility of a Romney victory, but right now, with the Obama victory, we’re seeing the potential for further actions by the Fed,” said an ETF trader who spoke to IndexUniverse on condition of anonymity. “Ultimately, Obama’s victory leaves the door open to QE policy.”
Worries And More Worries
Longer term, the Fed’s “quantitative easing” aimed at stimulating the economy by keeping borrowing rates exceedingly low continues to fuel concern that a potentially serious rise in inflationary pressures is in store for the economy.
Add to that inflation angst a long list of other gnawing worries—including the eurozone’s crisis, potential conflicts in the Middle East, higher taxes and lower spending on the domestic front—and you have the makings of some of the most acute uncertainty in a long time.
“The dispersion right now between different people on what it all means to investors is astounding,” money manager Jonathan Citrin told IndexUniverse. “People are sincerely confused and there seems to be more uncertainty in the market than ever.”
Indeed, one of the outcomes of the election was a continuation of the deeply divided Congress.
Apart from the fiscal cliff issue that needs to be addressed by the end of the year by a lame-duck Congress, one of the big issues on investors’ minds today is the increased likelihood that taxes—on income as well as on dividends and capital gains—will increase significantly.
“The last time dividend tax rates were increased was 1993 under President Clinton. We analyzed this period and found that high-dividend stocks performed quite well,” WisdomTree’s Director of Research Jeremy Schwartz said in a research note Wednesday.
WisdomTree, known for its ETFs that screen securities for earnings and payouts, markets a family of dividend-focused funds, including the $1.26 billion WisdomTree LargeCap Dividend Fund (DLN) and the $1.18 billion WisdomTree Dividend ex-Financials Fund (DTN).
One issue helping dividend stocks—even in an environment of higher taxes—is the fact that other assets such as U.S. government and corporate bonds are delivering yields at all-time lows, a reality that should keep income-seeking investors looking to dividend stocks, he added.
But that precedent wasn’t proving enough to calm investor jitters when it came to the macroeconomy.
“We are going to find out quickly what the fiscal cliff environment is going to look like,” Citrin said. “But I’m worried about the fiscal cliff, and I’m worried about a potential credit rating downgrade.”
“If we experience a downgrade and take this fiscal cliff issue to the 11 th hour, the market reaction is going to be more severe than it has been in the past,” he added. “It’s more serious this time.”
Taking The Long View
Even as worries are a way of life for markets, it’s sensible to take the long view because, in the end, markets will heal and the economy will normalize, even if that process is maddeningly slow.
“We have a void of things to worry about right now. So we have to fill it with something, and it’s being filled 70 percent by the fiscal cliff and 30 percent by Europe,” the hedge fund manager said. “Traders don’t like to think they’re this primitive, but we are.”
But as this hedge fund manager takes stock of what’s prospective for investors even as they soldier through the angst, he sees the investment landscape in broad brushstrokes that seem to transcend what either an Obama or Romney administration might mean and might have meant to asset prices.
“I think the gradual recovery will continue, and I want to bet against things that are priced for aggressive growth because I don’t think we’ll grow that fast, and I want to be long things that reflect continued healing of balance sheets,” said the hedge fund manager.
That means perhaps shorting high-flying stocks like Apple, and taking the long view on companies that suffered the brunt of the credit market meltdown, including homebuilders and companies like AIG and General Motors.
"You want to bet on some of the guys that were trashed during the crash—not because you think they’re going to grow quickly, but because expectations are very low, and their balance sheets will progressively heal.”
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