Post-Election ETF Losers: Financials, Mining, REITs

The media love to have it both ways. On the day before the election, the markets barely budged, supposedly waiting on the election. Pundits said that the markets needed to see that there wouldn't be a disputed winner or hanging chads. But once the election was behind them on Wednesday...

On the day of election, however, the media explained the 300+ Dow gain as a result of the election being "behind us." Yet we had the exact same probable Obama victory on the "day of" as "the day before."

On the "day after," the markets were falling 300+ due to the same economic uncertainty. Really? Isn't it more likely that we received a bear market bounce off of October lows, and that the bounce would have happened no matter what was happening leading up to and winding down from the election?

While there's very little visibility on the economy at large, or conditions around the world for that matter, we may have a so-called bottom in-and-around Dow 8000. Intra-day, 7780 has held twice. A third "test" of the market lows by the major indexes may have to occur to wash away forced redemptions, fear-driven selling and tax loss selling.

Of course, the thought of more volatility to the downside, the kind that drops the Dow for another 15%, is painful enough to contemplate. Yet there seems to be strong historical evidence that supports the notion that the markets won't go lower than the aforementioned "bottom." Indeed, since 1938, U.S. markets have historically held firm when they get near 50% losses from the top. Moreover, the S&P 500 was collectively trading at a price-to-book-value (P/B) of 1.2 on October 27, which is rarely seen in the history of the benchmark.

The same issues hold for international markets. In particular, at the October 27 lows, the Nikkei in Japan was trading at book value. Book! It has since rebounded significantly, and it is currently trading near a P/B of 1.2. Historically, the shares have traded at a P/B closer to 2.

Election ETFs		Before/During/After (5-Day)			Day After (Through 2 p.m. EST)
Metals/Mining (XME)			5.50%			-6%
Vanguard REIT (VNQ)			8.00%			-5.50%
Financial Services (IYG)			8.50%			-5%

If the election showed that big change is coming to Washington, it hasn't yet showed the possibility of big change coming to Wall Street. The biggest losers after the election have been the biggest area of concern.

Think about the most maligned segments of the U.S economy... and the reason for the drop in corporate share prices. A housing bubble burst due to greed on Main Street. All things real estate, particularly real estate investment trusts, were one of the first areas to head south in 2007.

A credit/lending crisis due to Wall Street greed nearly destroyed the world's financial system. Financial services firms (IYG) from brokerages to lenders to insurers felt it worse than more conservative regional banks. They started tanking a little later in 2007.

But in 2008, you still had a bull market in commodities and commodity companies. Up until June 08, you still had a commodity rush. Then the commodity balloon burst, leaving miners/drillers/explorers down 50% alongside most resources.

So what has really changed, then? The companies that bring "stuff" to the world are reeling far more than health care or utility companies. The financial companies are facing greater regulation, lower leverage, lower profitability, and a great deal of uncertainty.

REITs may be the one area that's a steal, since they are furthest along an eventual road to recovery. And if there's one bright spot in the extreme price swings, it's the certainty of eventual recovery.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[timToolTime:]

Obama election news took every down today. Vanguard (of the three you talk about) is the most surprising. You would think that a Obama contibuter would be on the winning side of all this mess.

BTW, Vanguard is actualyy on the border of following their November 2007 path. take a look at the data:
stocktruth.com/chart.p...

So we cant blame it all on OB, but I really don tthink I am wrong.

2008 Nov 05 11:44 PM