Don’s Outlook 11/7/08
An Election Day rally turned into a post-Election Day rout as investors reversed course following the election results. The rally was not a one-day phenomenon, however; it started a week earlier. From a low of 848.92 to a high of 1,005.75, the seven-day revival netted 18.47 percent for the S&P 500 Index.
America voted for sweeping change this week, and there will indeed be policy changes as a result. What matters most for investors, however, is the economy, and economic indicators still point to global weakening. Several companies announced lower earnings or lowered their fourth quarter projections this week. The world’s largest steelmaker, Arcelor Mittal, had a hand in deflating the rally when it doubled its fourth quarter production cuts to 30 percent. Shares lost more than 20 percent on the announcement and were down another 15 percent this yesterday. After the market close on Wednesday, Cisco warned that revenues could fall as much as 10 percent this quarter, but its stock was only down about 2 percent.
These numbers should not have surprised the market—negative economic data has rolled in steadily for weeks. Market bottoms are reached before the bad news ceases because it takes time for a recovery to show up in the statistics. If investors have not factored lower earnings into their decisions, they will sell stocks on bad news, even if they are already undervalued. For this reason, long-term, patient investors may be presented with several opportunities to invest at fire sale prices in the fourth quarter, as investors focused on the rear-view mirror will heavily discount future profits.
Many of the concerns that have weighed on stocks in recent weeks—dislocations in the short-term credit markets; the onset of the current earnings season; the 2008 Presidential election; and forced liquidation of mutual fund and hedge funds alike—are either problems or questions that are beginning to resolve themselves.
Now that Barack Obama is our President-elect, much of the uncertainty caused by this heated Presidential Election is behind us. If you would like to learn more about Barrack Obama’s stance on energy, healthcare, taxes, and the financial markets, please view the latest Dion Money Management Web video, in which Phil Orlando, chief equity market strategist at Federated Investors, and I discuss the implications of an Obama presidency for clients.
