What’s Old Is New Again
Investors on both sides of the aisle hoping that the certainty of having a declared winner of the U.S. presidential elections would lift stocks out of their recent funk were sorely disappointed this week. The post-election landscape looks much like the one that existed before Tuesday: a split Congress, an Obama presidency, and plenty of uncertainty about how the national leadership will address the fiscal cliff. Despite some evidence from both parties indicating a willingness to compromise, stocks fell sharply after the election and retreated 2.4 percent for the week. In contrast, fixed income investors took heart in an Obama presidency that would retain Bernanke and his easy money policies (for as long as he’s willing to serve), leaving Treasuries well bid in an environment of open-ended QE. Coupled with increased uncertainty about the fiscal cliff and its effect on economic growth, Treasury bonds gained, pushing the already low yield of the benchmark 10-year security to a slimmer 1.61 percent.
Jockeying for Position
The equity sector moves that followed Tuesday night’s drama spoke volumes about how investors view the post-election prospects for various industries. While the stock market was experiencing its worst daily decline in months, hospital stocks like HCA and Tenet Healthcare surged on the now certain implementation of ObamaCare, which promises to boost patient volume and reduce the bad debts of this industry that has long suffered write-offs from uninsured patients unable to pay their emergency room bills. In contrast, bank stocks like JP Morgan and Wells Fargo sank, as investors speculated that a continued slow-growth economy would mute loan volumes and hinder profitability. Energy stocks were also hit hard on concerns about more exacting environmental standards and a reduction of potentially available drilling acreage. And while consumer stocks outperformed on the belief that demand for Tide laundry detergent won’t vary much regardless of who occupies the White House, the typically defensive utilities sector outperformed by a surprisingly small margin due to concerns about tax rates on dividend income that are poised to rise.
Taxes … Nowhere to Go but Up?
Which brings us back to the fiscal cliff, the $600 billion of tax increases and spending cuts set to occur on the first of January absent Congressional action between now and year-end. We believe that lawmakers and the President will reach an agreement to forestall the most austere aspects of the cliff, but the more important question is, “When will true tax and spending reform occur?” If political leaders kick the proverbial can down the road and fail to establish a permanent tax structure while forestalling the entitlement reform necessary for putting the nation back on a sustainable fiscal path, new investment and hiring are likely to remain depressed. And while the fiscal detail is impossible to know, investors are correct to assume that taxes are going to increase and government spending is likely to fall. If any “grand bargain” is to occur between the Democrats and Republicans, it must contain both elements.
A Book End to Earnings Season
As investors continue to speculate about which platforms will prevail in the smart phone wars—Android, Apple’s iPhone or the new Windows 8 for those who prefer out of the money call options—one industry participant common to all three platforms continues to win … Qualcomm. Snapdragon chipsets flew off distributor shelves in the most recent quarter and, unlike most semiconductor companies, its chip prices actually increased. Against a backdrop of declining stock prices, Qualcomm’s stock rose 4 percent for the week as sales and earnings blew past expectations.
Our Takeaways from the Week
- U.S. elections reverberated through financial markets, pushing stocks broadly lower as investors jockeyed for position amid the new political reality
- Fiscal headwinds are intensifying and threaten to slow the growth of an already modest economic expansion