by Keith Fitz-Gerald | November 9, 2012 7:00 am
Bitter, negative, expensive…I am hard pressed to find any positive adjectives describing this year’s presidential campaign.
Evidently, the markets are struggling, too.
As was widely expected leading up to the election, all of the major averages got slammed in early trading on news of President Obama’s victory. Just over an hour into yesterday’s session, the Dow dropped 262.51, the S&P 500 tumbled 27.58 and the tech- laden Nasdaq fell 59.55. Oil tanked 2.95% and $2.62 per barrel to $86.08 while 10-year bonds saw yields plummet 6.20% to 1.63%.
There is a bright side, though. Now that all the hoopla is over, investors can get down to business.
Here’s what I’m expecting:
The $600 billion fiscal cliff we’ve warned you about has never gone away. It’s been marginalized by the campaign, but it has never disappeared. It is, bar none, the single- biggest issue facing our country at the moment.
But President Obama’s re-election means a lame duck president and a lame duck Congress. Rather than a grand solution, expect more grandstanding and another game of kick the can down the road.
Generally speaking, the markets are going to be very choppy in the near term. Fully half the traders on Wall Street woke up on the wrong side of the proverbial bed Wednesday and they’re going to have to adjust their bets accordingly.
The most stable, defensive and, ironically, opportunistic choices will remain large, super cap stocks. I call them “glocals.” These are companies like McDonald’s (NYSE:MCD), Procter and Gamble (NYSE:PG), General Electric (NYSE:GE), ABB (NYSE:ABB), Raytheon (NYSE:RTN) and Vodaphone (NASDAQ:VOD).
All of them are global brands and have the experience needed to manage real growth despite challenging economic conditions around the world. Most typically pay high income that offsets the risk of ownership and are therefore far more stable than non-dividend paying alternatives.
Small cap stocks are just the opposite. Unless there is something especially compelling about them, like a truly unique patent or a new long- term government contract, the volatility will be more than most investors are prepared to accept. Most pay no income whatsoever so they’re a crap shoot in today’s environment.
And don’t forget to hedge your bets while you’re at it. Inverse funds that offset market volatility are a viable alternative to simply hanging on and hoping for the best. Not only can you protect the value of your income and dividends by smoothing out the volatility, but specialized choices like the Rydex Inverse S&P 500 Fund (MUTF:RYURX) can help investors stay in the game and generate gains that take the sting out of otherwise problematic losses.
I believe bonds will play out for just a bit longer. When this crisis started, I predicted yields would drop all the way to 1.5% on the 10-year note and people thought I was the exorcist. Now that Obama’s reelected, I think we could see yields drop all the way to 1%. This means there is still, as hard as it is to believe, additional upside in bonds.
Obviously, this is going to be challenging in its own right given that interest rates are hovering at the extreme low end of the spectrum. The best advice here is to keep duration short. My research suggests that 3-5 years is best because that will help investors avoid much of the volatility associated with rising rates in longer dated instruments when they do ultimately come into the picture. Anything longer simply adds unnecessary risk .
Don’t forget muni bonds. The same duration concept applies here. Keep things short. Every state in the union has budgetary problems and I think we’re going to see a well-intentioned but completely flawed national policy level response no later than 24 months from now as many states begin to run out of money.
As for gold and oil, those are both special topics.
Gold is in a league by itself. Following Obama’s reelection, there’s likely to be a knee-jerk reaction to higher prices as investors move to hedge their bets. That’s good, but watch out for the inverse. In the short term there is a real risk that gold falls, not as a function of longer term hedging, but because traders who have used it to collateralize other investments will sell it to raise cash.
As far as I am concerned, that’s a buying opportunity. President Obama’s first term policies created a lot of damage and his second term is likely to reinforce the need to preserve value even more. Investors, traders and central bankers around the world are all acutely aware of this and that bodes well for higher prices.
Oil is closely linked to economic expansion by most investors, so it’s down on the assumption that President Obama’s second term will lead to slower growth. That’s a mistake. No matter what happens with the global economy, oil demand is actually escalating and fully 60%-80% of new demand is expected to come from Asia and specifically China. This makes stocks like CNOOC (NYSE:CEO) especially appealing.
Defense stocks are widely expected to take a hit as Obama softens national priorities. That’s a buying opportunity, too. The world is becoming a more complicated place by the minute and even if our own defense spending drops, that of our allies will rise. This is particularly true in the Asian Rim where China seems intent on rattling sabers and flexing its economic muscle.
As I noted on Tuesday, an Obama win also means the “greenies” will have a field day with continued emphasis on solar, wind and electric alternatives. Given the administration’s widely publicized screw-ups in this area, use caution though and do not confuse subsidies with profit potential. It’s still hard to find solid small-cap tech companies in a defensively oriented big cap market. Unless you’ve got a strong stomach for volatility or an extraordinarily compelling reason for investing under the circumstances, I’d stay away.
And finally, there’s China. The 18th National Party Congress gets underway today and the world will bear witness to a once-in-a-decade power transition at a time when the Red Dragon is plagued by economic challenges and corruption on a scale that has boggled even the most jaded of insiders. I don’t think Obama will be able to stand up against China’s new leadership by the way. (I’ll have more on that in a future story)
Still, the nation is growing and American companies are betting big there. Some, like Yum! Brands (NYSE:YUM), Coca-Cola (NYSE:KO), and McDonald’s are obvious.
But some like Mosaid Technologies (NYSE:MSD) and Best Buy (NYSE:BBY) aren’t. The former, which you may know better as Merck (NYSE:MRK) in the United States, expects 30% growth in China over the next 12 months alone and triple that in the next five years. That’s why the company is hiring reps and building a $1.5 billion research facility in Beijing despite slash-and-burn expense reductions in the United States and Europe.
Whether Obama’s in office or actually “in” office is moot. Try your best to dismiss the rhetoric and the posturing that’s already started.
There are still plenty of opportunities ahead to be had if you know where to look and how to protect your money in the meantime.
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