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Michael Michaud is the founder of ( and the Invest2Success Blog ( He has been investing and trading in the financial markets since 1989. He founded to empower individual institutional... More
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  • Looking Past The Election With Your Investments 0 comments
    Nov 6, 2012 6:36 PM

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    Looking Past the Election with Your Investments - by Morningstar Investment Research

    The market appears to be in a "wait-and-see" mode in advance of the elections, but looking beyond November 6th is important for investors.

    The market appears to be in a "wait-and-see" mode in advance of the elections, but looking beyond November 6th is important for investors. The election is only one piece of the puzzle, and certain aspects of the political landscape likely won't be much clearer after Election Day.

    Earnings season has been somewhat disappointing, even though there was a relatively low bar to hurdle. We see more signs that the slowdown in the United States may be ending, however, with strength in housing particularly noteworthy.

    European policymakers continue to drag their feet, although there is likely some comfort that the ECB has attempted to take the worst-case scenarios off the table. Chinese growth remains sluggish and despite the possibility of a near-term rally, longer term pressures remain.

    As for the election, it appears likely that party leadership in Washington will continue to be split. The House is likely to remain under Republican control, while the White House and Senate are very close calls. Assuming no single-party sweep, some measure of gridlock could remain regardless of who wins the presidency. Regardless of how the election turns out, uncertainty regarding both the fiscal cliff and long-term debt and deficit reduction plans will likely remain.

    In spite of the election uncertainty, the coming fiscal cliff, continuing dithering in Europe, the slowest rate of growth in China since 2009, and tensions rising in the Middle East, the stock market continues to be near five-year highs-despite the recent pullback. Notably, the weakness over the past couple of weeks appears to have worked off some of the excessive optimism (a contrarian indicator) that had developed. According to Ned Davis Research, as of October 23rd, sentiment had moved into the neutral zone from the extreme optimism zone, which we view as a positive development to set up the market for another possible move higher.

    Are the clouds parting?

    Third-quarter earnings season has thus far somewhat disappointing despite relatively low expectations. Companies have mostly met or exceeded bottom-line expectations but revenue growth has been more disappointing. This is not surprising given the global slowdown over the past several months. With continued massive corporate cash balances on the sidelines, however, a few small holes in the dam of continued cautiousness could lead to the floodgates being opened. Animal spirits continue to be a potential powerful force behind the economy that could be unleashed if some uncertainty wanes.

    Helping push businesses in that direction could be improving US financial conditions; characterized by easier credit access and a more receptive equity market. One broad measure of financial conditions comes from the National Financial Conditions Index, released by the Chicago Federal Reserve, which is now showing its lowest (most attractive) reading since June 2007.

    Financial Conditions Support Business and Consumer Expansion

    US Financial Condition

    After the economy again flirted with stall speed for the third consecutive year, there are signs that the mid-year slowdown may be coming to an end, and growth may accelerate. The manufacturing sector, for example, saw a sizable midyear slowdown, with the Institute for Supply Management's Manufacturing Index falling into territory depicting contraction. The most recent reading, however, was above the key 50 level and some regional surveys also are showing further improvement. The Empire Manufacturing Index, although still in negative territory, rose to -6.16 from -10.41, while the Philadelphia Fed Index moved into positive territory for October by posting a reading of 5.7 after -1.9 in the previous month. Additionally, industrial production for September rose 0.4%, after falling 1.4% in August, while capacity utilization ticked up to 78.3% from 78.0%-all marginal improvements but moves in the right direction.

    More important may be the improved health of the consumer. Data from September started with a bang as retail sales posted a surprising jump of 1.1% month-over-month, while excluding autos and gas, the gain was still a solid 0.9%. Heading into the critical holiday shopping season, we view this positive momentum after a negative reading in the summer as a good sign; and reflective of much-improved consumer confidence and sentiment. Additionally, gasoline futures prices, according to ISI Research as of October 18, are down about 20 cents, which could provide a further boost for consumers.

    Retail Sales Rebound?

    US Retail Sales

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