The market staged the biggest pullback in nearly a year on Wednesday. All indexes were down more than two percent. It was the worse post-election sell-off since 1948 as investors took in the long term gridlock voters choose to put in place.
"Well, I say to them tonight, there is not a liberal America and a conservative America - there is the United States of America" - Barack Obama, Democratic National Convention (2004)
"I believe we can seize this future together because we are not as divided as our politics suggests. We're not as cynical as the pundits believe. We are greater than the sum of our individual ambitions, and we remain more than a collection of red states and blue states" - Barack Obama, Acceptance Speech (Nov 2012)
One of the key reasons the market sold off was investors' doubts about whether the two sides can reach an agreement to avoid the "Fiscal Cliff." Both parties are saying the right words. Speaker of the House Boehner announced yesterday that Republicans would consider additional tax revenue under the "right conditions." He had to read directly from the teleprompter in order to keep from veering off message. The president (See above quotes) has always spoke eloquently about the need for bipartisanship and "working together" but has rarely, if ever, has shown the leadership and effort to make this happen. Let's hope this time his actions match the rhetoric.
The second reason the market sold off is that it really needs to in order to get over the looming fiscal cliff. Both sides need the cover of a plunging market in order to be able to come to the concessions needed and that will be unpopular to their bases. Much like the market had to plunge some 700 points on the Dow after Congress first rejected TARP before it could muster enough political will to get the bill over the finish line on the second try. Look for the market to continue to be volatile until the politicians do what needs to be done.
The other big driver of the market downturn yesterday was news coming out of socialist Europe. ECB head Draghi announced that the European commission is cutting its growth outlook for the EU amid the eurozone debt crisis, forecasting deeper recessions in austerity-battered nations and lower growth in France and even Germany. Other than stating the obvious with some curious timing (one day after the election), this put a huge damper on the market as European demand is likely to fall further in the months ahead. This will reduce worldwide growth projections and provide a significant headwind to the markets in the near term.
Apple (NASDAQ:AAPL) sold off another 15 points yesterday and is now significantly under its 200 day moving average of around $585 a share. AAPL has had a terrible month (See chart) and the stock has now pulled back more than 20% since its recent highs and is officially in "bear" territory. I think the pundits are underestimating the psychological impact this is having. Not only Apple the biggest stock by market capitalization, it is also the biggest contributor to overall NASDAQ and S&P index performance as well. In addition, if you surveyed the general public on their favorite stock up until September; Apple would have been the clear winner. Seeing the stock plunge on a daily basis can't be helping investor demand right now. I believe if Apple can hold its next support level of around $525 to $528 a share (The mid-May lows) or can rally; this should help overall market sentiment.
Finally, the Chinese government is going through their once a decade leadership transition. A lot of questions on the future direction of the country are currently unanswered. This is putting a damper on equities on the margin, especially sectors driven by demand from China such as commodity stocks. It will probably be several months before the market has a good handle on which way China will head in the years ahead.
The market in coming weeks is looking to be more volatile than it has been in many months. Investors with cash on hand should be presented with several opportunities to buy good stocks at lower entry points as we work through these major unknowns, so be patient. Good stock pickers should thrive in this environment.
Stay safe out there.