Stock Markets Sell Off as The “Fiscal Cliff” Arrives

 Stock Markets Give Back More of 2012 Gains

The 2012 election came and went this week and was the primary catalyst for much of the movement in the stock markets worldwide.  The markets began the week with promising economic news from the ISM Non-Manufacturing (Services) Index which represents approximately 80% of the USA economy. The ISM Index reported that the economy continues to be in expansion mode at a relatively strong 54.1. However the markets had their sites set firmly on the election – not the economy -  and chose to ignore the strong ISM number and close Monday at it’s lows.

On Tuesday there was first a mistaken report on the Cincinnati  Enquirer Website stating that Mr. Romney was running ahead of Mr. Obama in Ohio. Then the earliest initial exits polls from Ohio began reporting that President Obama was in the lead in Ohio. The markets responded to this news of President Obama lead in Ohio by moving sharply higher – we discuss this in more detail below. The markets ended up closing at their highs on Tuesday evening.

On Wednesday the markets were greeted by news out of Germany that the European banking crises was finally impacting their economy.  Also for the first time, the Fiscal Cliff was starting to emerge across the mainstream media as an issue of significance for the entire nation.  This caused the markets to retreat once they opened on Wednesday and by the time the week was finished the S&P 500 had sold off by 3.5% from it’s highs.

The net result of this weeks activity was that the S&P 500 lost 37 points or 2.4% for the week. The S&P 500 is now down by 6% from it’s recent 5 year highs that were attained on September 12, 2012. 

In the Photo Section is a chart of the performance of the S&P 500 for 2012.

(See Chart of The S&P 500 in The Photo Section)

Apple Computer closed this week at $547 – down 22% from it’s recent high of $706.  Apple is important to the market because it has been the leading stock for 3 years now and when the market leading stock breaks down like Apple has done it makes experienced investors nervous about the health of the overall market.

Apple has come under recent criticism that it is no longer an innovative company and that the person who was the primary innovator no longer works there (RIP Steve Jobs). Critics of Apple state that there has been no new products from Apple for a long period of time – just modifications of existing products such as the Iphone 5 and the new mini-Ipad.

If Apple is now “Just another Computer Hardware Company” it will trade at a lower multiple and that is what the market is doing now – pricing Apple as “just another hardware company”. Now whether this new perception of Apple is correct or not is still to be determined – and this is an example of what makes investing in individual companies so challenging. Apple down 22% from it’s highs is now either a good buying opportunity or we are at the beginning of what could be a very long ride lower in the price of Apple stock. There are many people who are presenting convincing arguments of both viewpoints. We think short term that Apple will remain under selling pressure before staging a recovery of some of it’s recent losses.

It would also not surprise us if Apple announces an increase in it’s dividend (currently 2%) or a special dividend before the end of the year because Apple has so much cash on it’s balance sheet and the dividend tax rates are scheduled to increase from 15% to as high as 39.6% in 2013 if there is no settlement of the Fiscal Cliff.

2012 Election Results Sends Equities Higher – Europe & Fiscal Cliff Brings Them Back Down

There was more volatility than normal in the markets this week which was to be expected with the USA elections. The markets moved higher on Tuesday around 12:00p.m. once initial exit polls out of Ohio showed President Obama running ahead of Mitt Romney. The markets responded favorably to an Obama victory because Wall Street knows that an Obama victory would result in Federal Reserve Chairman Ben Bernanke and his easy money policies would remain in place for the near term future. These policies have been excellent at driving asset prices higher over the past 4 years.

However on Wednesday the reports of bad economic news out of Germany and the realization that the resolving of the up-coming fiscal cliff was falling on the shoulders of a divided USA congress sent the markets lower.

In the Photo Section is a 15 day chart of the S&P 500 which shows the impact that the election had on the stock markets and the subsequent sell-off that is being attributed primarily to the up-coming Fiscal Cliff:

(See Chart of The Chart of S&P  500 - Election Day Special in The Photo Section)

Stocks were not the only investments to moved higher on Tuesday. Once it became apparent that President Obama would win the election, precious metals led by Gold surged higher – almost $30 in just one hour on Tuesday. However unlike the stock market, Gold held it’s gains and closed this week near it’s highs at $1,731 an ounce.

In the Photo Section is a chart of the performance of Gold for the week. One can easily see the dramatic move higher in Gold on Tuesday once the first results of Ohio’s exit polls were released.

(See The Chart of Price of Gold Rises on Obama Victory in The Photo Section)

Gold closed the week at $1731 as investors responded to a belief that with an Obama victory, the Federal Reserve easy money policies will continue.

The Fiscal Cliff Emerges from the Shadows into the Mainstream Consciousness

We recently commented extensively on the fast approaching Fiscal Cliff for Patch readers.  You will probably be hearing a lot more about the Fiscal Cliff over the next few weeks because it does affect nearly every person. The estimates are for people with middle class incomes, their 2013 taxes will increase by $2,000.

Most people are now aware that their social security taxes will be heading higher next year by 2 percentage points. That means if you make $50,000 you will be taking home $1,000 less dollars in 2013. And this is just the beginning of the impact of the up-coming “Fiscal Cliff’.

We discussed earlier the negative impact of the up-coming Fiscal Cliff on the markets this week. We also noted for the first time the use of the term “Fiscal Cliff” continuously in the mainstream media this past week. To demonstrate how the Fiscal Cliff has emerged all of the sudden into the consciousness of the American public we have prepared a chart.

In the Photo Section is a 90 day Google trend chart for the search term “Fiscal Cliff”. There was not much activity for this search term until a few days ago when suddenly the “Fiscal Cliff” search term went from near zero to 100.

(See The Chart of Google Search Trens for "Fiscal Cliff" in The Photo Section)

Announcement  – Complimentary Seminars for “The Fiscal Cliff & It’s Impact on You”.

Due to the importance of this subject, Reliance Investment Management has prepared a seminar on “The Fiscal Cliff & it’s Impact on You”. We invite you to attend. We are certain that you will find this seminar both relevant to you and your family financial well-being as well as being informative.

We will also be presenting our ideas on investment ideas that can capitalize on all these changes in the tax laws. We will also comment on the types of investments that could be harmed.

We will be presenting The Fiscal Cliff & It’s Impact On You seminar at the following locations and times. Admission is free. Guests are welcome.

Sammamish Public Library           Saturday November 24th          10:30 a.m. – 12:00 p.m.

Issaquah Public Library                  Saturday November 24th           2:00 p.m. – 3:30 p.m.

Mercer Island Public Library         Sunday, November 25th            1:30 p.m. -   3:00 p.m.

Closing Thoughts

Forecasting at this moment in time is very challenging. There are several opposing factors in play that makes gauging the direction of the markets very difficult – they are:

• Economic Results have been improving recently – However Corporate revenues and earnings are being guided lower for the next quarter at the highest rate in years.
• Europe is in a recession – China and much of the Far East are close to one – Yet the USA economy continues to grow at a slow but steady rate.
• The S&P 500 has corrected 90 points or 6% from it’s recent highs – Yet Credit Spreads (which increase when the markets get nervous)  have not widened which is a positive.
• Business are feeling less optimistic about future conditions – However consumers are feeling the most optimistic in nearly 5 years.
• The Stock Markets have now entered it’s best performing months of November to April  – Yet the Fiscal Cliff might trigger an higher amount of selling than usual in the remaining weeks of 2012 as investors lock in lower tax rates.

The stock markets are in full correction mode. The S&P 500 closed Friday right on it’s 200 day moving average. The 200 day moving average is a technical indicator that should provide some support for at least a bounce higher early next week.

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John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC  a Registered Investment Advisor Firm.

This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision.  We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.