“Now that the election is over, the market quickly turned back to some pretty harsh realities.”
Stocks spent most of the week on the ropes, falling lower on newborn concern over the fiscal cliff and Europe.
Now that the election is over, the market quickly turned back to some pretty harsh realities. The first of course is the fiscal cliff, a combination of tax hikes and spending cuts set to kick in on Jan 1 unless congress intervenes. Economists estimate that could knock as much as 4% off off GDP, which would be a huge blow to the economy and market.
But of course this didn’t sneak up on anyone, Congress and the politicians have known about it for over a year. But they have procrastinated in finding a solution, and then used the election to put it off a little more. So now with the fiscal cliff lingering just more than 6 weeks away, the market is nervous about a resolution.
Beyond the fiscal cliff, Europe came screaming back into play this week I think maybe just seconds after news that Obama had won re election. But now that the Euro and Fed friendly Obama is on board for another 4 years, the region can once again begin airing its dirty laundry. And make no doubt about it, there is dirty laundry. Europe is worse than ever, hanging by a string. And that got priced into the market this week, combining forces with the fiscal cliff to send stocks to their worst performance in five months.
As it stands, the S&P 500 is down 6.4% from its high of 1,474 in mid September. That’s 95 points on the S&P, adding some weight to the recent pullback. The action looks a little oversold in the very short run, but it seems like the bears are taking the market. On both fundamentals, with little to feel good about (fiscal cliff/Europe), and on the chart, where the 4-month up trend has been broken. This is turning into one of the bigger pullbacks we’ve seen this year and in the last 2 years. Take a look at the Daily chart for the S&P 500 in 2012 below.
This is the S&P 500 in the last two years. You can see how the recent pullback stacks up against weakness in the last two years. You can also see that stocks are sitting on decent gains on the year and in the last two years. It’s going to be tempting for a lot of big players to take some gains off the table ahead of potentially higher taxes in 2013. That’s a huge incentive to sell stocks. That trend is already playing into the recent round of weakness. Take a look at the recent pullback in the 2-year chart below.
Looking forward, the fiscal cliff and Europe will be well in play, but we’ve also got some important consumer data on tap. The mood of the consumer will be closely watched ahead of the holidays. Any up side surprises would pull a little weight on the Street against a larger downtrend.
We’ve also got inflation data. So far, in spite of trillions of liquidity being pumped into the global banking system, the inflation numbers the Fed watches are showing no sign of inflation. Deflation is still the bigger threat. Which gives the central banks plenty more room to stimulate. Inflation has showed up in emerging markets like India and Brazil, but as long as the developed nations have room to stimulate, they will pursuit the path of least resistance.
- Wednesday-Producer Price Index, Retail Sales
- Thursday-Consumer Price Index, Manufacturing, Empire and Philly
- Friday-Industrial Production
For the time being the bears have the market. There could be short-term rallies but there’s still nothing for the market to feel good about. And the Europe story is getting worse. That’s going to cause some serious problems. So stay patient in general. Maybe you dip your toe in a little bit here with the S&P 500 down 6.4% but there is still plenty to worry about that could send the averages lower.
That’s all for this week, but until next time, here is a follow up to consumer spending going into the holidays. The trend actually looks pretty solid. Enjoy.
Remember, the trend is your friend and don’t fight the Fed. Until it’s time to fight the Fed.
Your Investment Partner,
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).