Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: Wall Street sold off heavily immediately following the election results that confirmed President Obama’s second term. Was the sell-off due to the market moving on from the election to other headwinds, or was it just displeased with Obama’s re-election?
Stovall: You can’t ignore the market’s response to the election outcome, however, I’m a little bit perplexed because I believe the market telegraphed that the President would get re-elected based on its performance since July 31, the market’s correlation with the Obama poll numbers according InTrade.com, as well as the sell-off in high-yielding stocks as compared with low or non-yielding stocks since the end of September. So maybe this was a case of “sell on rumor, sell more on fact.”
Or, maybe there was a lot more to do with this than simply the outcome of the election. Possibly investors were hoping that the Senate would swing into Republican control, which did not occur, thus leaving Congress again in a gridlocked environment. Also, investors are probably concerned once again that Congress will come to no resolution of the fiscal cliff between now and the end of the year, which is something that all on Wall Street and Main Street hope that Congress does accomplish. Lastly, there remain some concerns in Europe related to Greece, its debt levels, etc. So in a sense, you can say that now that the diversion of the election has run its course, it’s back to politics and economics as usual.
EQ: Some of the early losers from the election results included Energy, Health Insurance and Defense stocks. Dividend stocks have also lost some appeal, as you covered in this week’s Sector Watch. Was this to be expected based on the President’s campaign positions?
Stovall: The President has said that he would like to see the Bush tax cuts expire for families making $250,000 or more. Combine that with the investment tax that was part of the Obama healthcare plan, and investors could see that tax on dividends nearly triple. In addition, they could see that tax on capital gains more than double. So investors in high-yielding stocks, not surprisingly, sold in response to the President being re-elected as they await the outcome with the hope for compromise relating to the Bush tax plan. The sell-off in specific industries such as Defense is not a surprise. Governor Romney said he would not cut defense spending as much as the President plans on cutting defense. Energy is also a group that investors had hoped would do well if Governor Romney were elected because Republicans traditionally have been more laissez-faire and less regulatory minded. Also, there was the possibility that the Republicans would push through the completion of the Keystone Pipeline more quickly than it’s currently slated.
In terms of Health Insurance, I’m not really sure why they would do poorly, specifically because the Obama healthcare plan will likely add 30 million new enrollees, which would help defray the cost associated with a reduction in fees. In general, investors are just trying to make heads or tails out of the presidential election, the continued gridlock in Washington, and the possibility of no resolution to the fiscal cliff before the end of the year.
EQ: The balance of power in Congress remained the same with Democrats holding control in the Senate and Republicans in the House of Representatives. What kind of impact do you think will have as more attention shifts to addressing the fiscal cliff?
Stovall: If Congress ends up putting the country before politics, and we avoid the fiscal cliff, investors will breathe a sigh of relief and it will push share prices higher. However, Congress has proven numerous times in the past that it has a hard time working well with those of the other party. So while a logical mind would say that it’s a no-brainer that the fiscal cliff would be resolved, when it comes to politicians coming to some sort of agreement, that logic becomes a little fuzzier. Should the U.S. fall off the fiscal cliff, even for just a short period of time, it will have a negative effect on the equity market as well as on the overall economy. Business leaders, investors, and consumers will sit on their hands and spend none of the money that they had waiting to be invested either in themselves, their portfolio, or their own companies until they get more clarity as to the direction of corporate and personal taxes in the years ahead.
However, I don’t think Congress has shown that it has changed its way since we experienced a near 20-percent bear market in the S&P 500 as a result of worries over the debt ceiling, our own debt crisis, as well as that in Europe, and the effect it had on the U.S. credit rating. So I believe that investors are very worried that the second verse will be the same as the first.
EQ: Are there any particular sectors or areas of the market that you think will benefit most than the rest of the market under Obama’s second term?
Stovall: S&P Capital IQ’s equity analysts have said that alternative energy is an area of preference for the President. Healthcare in general is another area that should probably do well because nobody is going to try to unscramble that egg now. The lower-end retail restaurants will probably do well since people will likely spend less with higher taxes. In addition, homebuilders might do well because the Democrats are looking to stretch out the foreclosure process to give consumers more time to come to terms with their banks. This could leave existing homes off the market and cause home purchasers to look to new homes more than they might otherwise have. So that could end up being a positive for homebuilder companies.
EQ: There was some talks that if Governor Romney came into office, Fed Chairman Bernanke would be at risk. Do you think having Obama back and Bernanke staying in position helps the market?
Stovall: Chairman Bernanke will certainly complete his term ending in early 2014, but since the Fed has been the only game in town in terms of attempting to do anything to boost the economy, in some ways I would say investors are breathing a sigh of relief that at least one proponent of economic stability and growth will still be around. I just hope that Congress starts to fulfill its responsibilities because as we’ve been told by Bernanke himself, the Fed cannot do it alone.