Obama vs Romney and our stocks

Founder and Publisher of the Switzer Report
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The next couple of weeks should be vital to what happens to stocks in the short and medium-term. The focal point is next Tuesday – Cup Day here and election day in the United States.

While borrowers, investors and nervous savers will sweat on the Reserve Bank of Australia’s interest rate decision on Cup Day, both outcomes could have a critical impact on what happens to share prices.

Right now markets, after a big surge between June and September, are going sideways with a slight slide, but there is no enthusiasm to sell-off or correct the market gains of recent times.

And that’s despite concerns over Spain and its delay in asking for a bailout, China being in slowdown mode, the US facing both an election as well as a fiscal cliff, and US company earnings for the September quarter coming in worse than expected. That said, nothing flash was expected. For the record, just over half of the companies in the S&P 500 index have reported and Thomson Reuters says that 63% came in with earnings better than expected, but only 37% had revenue numbers better than analysts were tipping.

The next move

All of the above considerations – Europe or Spain, China and the USA – have to be factored into a view on what happens to stocks.

My short-term view is summed up as more of this ‘go nowhere’ movement of stocks with a bias to falling, which could create a buying opportunity. This is based on the probability of an Obama victory and then a nervous negotiation period with Congress to avoid the fiscal cliff, which could push the US into recession.

Given this, I suspect even silly US politicians will eventually avoid the ‘cliff’ of the automatically triggered tax and spending cuts that will come in if they fail to agree on a better solution, but it will spook markets until that happens. It should happen before year’s end and as China and the USA will have better economic data and Spain should have asked for its bailout, this sets us up for a Santa Claus rally.

However, if Romney surprises and wins and the Republicans control the Congress, that rally could come earlier as the fiscal cliff arguments would be more resolvable and more market friendly.

Into next year

For the medium-term, I like the outlook for stocks in 2013 on the basis that the US economy will be getting stronger. This week’s housing and jobs data will be important to watch to assess this view.

I would argue China will be showing better growth figures and Europe should be able to beat its current recession, if Mario Draghi’s “whatever it takes” actions via the European Central Bank’s bond-buying program work. Last week, the UK registered a 1% jump in economic growth for the third quarter and it was not just Olympics-inspired.

There is still a lot of work for Europe to do to get its economy growing strongly again, but with a lower euro and less concerns over bond vigilantes making government borrowing an impossibly expensive experience, the seeds for economic improvement are being sown.

The likes of Blackrock – the world’s biggest fund manager – expects US stocks to be up 10% next year and Goldman Sachs has a similar positive view, which means they don’t expect the fiscal cliff to throw the US into recession.

If good sense prevails, then being in stocks in 2013 will be a wise play, just as it has been this year.

The bounce

Don’t forget history shows that following a sustained period of market declines and pessimism, when the opinion is that the really big threats have been eliminated, then stocks can have really big rebounds.

I don’t know when this will happen, but I want to be exposed to it when it does.

And the Aussie bounce will be a biggie as we are only up 42% since the low of 6 March 2009. The Yanks have done around a 100% to the upside sine the Dow hit a low of 6,547.05 on 9 March 2009!

One last comment – imagine if you were an American who listened to all of the debt experts who said the US Government was kicking the can down the road; you would have lost out twice: once when the market fell and twice when it rebounded. In that time US banks and car companies were rescued, they paid back most of the taxpayer’s money and the stock market has nearly recovered. Stock supporters are now in the black when you consider dividends, but if you were a Yank who went to cash, you would have averaged about 2% a year if you were lucky!

Debt repayment will slow down the US economy over the next few years or so, but this has been a lot better than a Great Depression, which would have happened if Governments had not spent up big.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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