Broadgate: Market News 19/11
19 November 2012
The 1987 crash. The Y2K bug. The debt ceiling debacle of 2011.
All these events, in the end, turned out to be buying opportunities forstocks. So will the “fiscal cliff,” some investors say as they watch favorite stocks tumble during the political give-and-take happening in Washington.
The first round of talks aimed at avoiding the “fiscal cliff” caused a temporary rise in equities on Friday, signaling Wall Street’s recent declines could be a buying opportunity. The gains were small and sentiment remains weak, but it suggests hope for market bulls.
Though shares ended moderately higher on Friday, it was not enough to offset losses for the week. The S&P was down 1.5 percent, while both the Dow and the Nasdaq fell 1.8 percent.
The S&P 500 is down more than 5 percent in the seven sessions that followed President Barack Obama’s re-election. Uncertainty arose as attention turned to Washington’s task of dealing with mandated tax hikes and spending cuts that could take the U.S. economy back into recession.
Some see the market’s move as an overreaction to hyperbolic headlines about policy gridlock in Washington, believing stocks may start to rebound in what should be a quiet few days ahead of the Thanksgiving holiday next Thursday.
“It just doesn’t seem to make any sense that you suddenly wake up the day after the election and realize we’ve got a fiscal cliff,” said Krishna Kumar, partner at New York hedge fund Goose Hollow Alpha Advisors.
Not long ago the S&P was on target for its second-best year in the last 10, riding a 17 percent advance in 2012. That’s been halved to about 8 percent, which isn’t bad but disappointing compared with just a month ago.
Investors have been selling the year’s winners. Apple is down 25 percent from its peak above $700. General Electric is down 14 percent; Google has lost 16 percent. Overall, the stocks that make up the top 10 percent of performers in the month prior to Election Day have been the worst performers since, according to Bespoke Investment Group of Harrison, New York.
“I think it’s a good opportunity to be long stocks at these levels,” said Kumar.
Hikes on capital gains and dividend taxes are on the line, and Obama has dug in his heels on what he sees as a mandate to make the tax code more progressive.
He seems to have the upper hand in dealings with Congress because Republican lawmakers don’t want to see tax rates increase, which is what will happen if no solution is found by the beginning of 2013. Republicans don’t want to take the blame for driving the economy over the cliff.
The current crisis is similar to last year’s fight to raise the U.S. debt ceiling, which led to the downgrade of the United States’ top credit rating in early August 2011.
During the dealings, the S&P 500 lost 18.8 percent between its peak in July 2011 and its bottom in August. As the market slid, the political standoff badly hurt investors’ confidence in Washington, setting off a spike in volatility.
In the end a deal was announced that raised the ceiling and put off longer-term fiscal decisions until January 1, 2013, setting the stage for today’s “fiscal cliff” crisis.
After staying flat through September 2011, the S&P 500 jumped 31 percent between its October low and the end of March.
BUY THE DIP?
Gridlock in Washington and all that could possibly go wrong with the economy if a deal is not reached have grabbed the headlines, but the negotiations leave room for stock market gains. Congressional leaders said Friday they will work through the Thanksgiving holiday recess to find a solution.
“The debate over how to solve (the fiscal cliff) may be more productive than is commonly recognized,” said Brad Lipsig, senior portfolio manager at UBS Financial Services in New York.
“The U.S. is facing a major debt overhang, and serious steps toward addressing it might ultimately be viewed as a positive for future growth,” he said. “The market may recognize this and, after a time of hand wringing, recover from the concerns with a renewed sense of optimism.”
The recent selling took the S&P 500’s relative strength index – a technical measure of internal strength – below 30 this week, indicating the benchmark is oversold and due for a rebound.
The RSI in four of the 10 S&P sectors – utilities, telecoms, consumer staples and technology – is below 30 and the highest RSI reading, for the consumer discretionary sector, is below 40, suggesting a bounce is in store.
“What I want to do is what we did during the decline following the budget negotiations in the summer of 2011: The lower the stock market goes, the more I want to own stock,” said Brian Reynolds, chief market strategist at New York-based Rosenblatt Securities.
“If we go off the cliff it will be with a bungee cord attached,” he said.
KEEP CALM AND HEDGE
Volatility is expected to rise through the end of November and to spike in late December if no agreement on the fiscal cliff is reached in Congress. Alongside comes opportunity for those with high risk tolerance.
“Recently, volatility has increased in the market overall. You can’t really pick it up in the VIX yet, but I think as we get through November, I think you’re likely to see the VIX be at a relatively higher level,” said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.
In 2011, the VIX averaged 19.2 in July and 35 in August. So far this month the average is 17.8 and it is expected to spike if negotiations on the cliff drag into late next month.
“Looking at the range of possibilities, I would say any of them would be better than sitting here waiting. I would even put going off the fiscal cliff in that category,” said Jill Cuniff, president of Seattle-based Edge Asset Management Inc, which manages about $20 billion.
“But we don’t believe Congress will let that happen; there’s going to be some middle ground here.”
U.S. stock markets ended higher on Friday on hopes that politicians would find common ground to steer clear of the “fiscal cliff” that would hurt the U.S. economy, while escalating tensions in the Middle East boosted oil prices.
But shares on major markets still posted a second consecutive weekly loss as the collective worry about the U.S. government’s fiscal problems and weak global economic growth weighed on sentiment.
Democrats said they recognized the need to curb spending and Republicans said they had agreed to put “revenue on the table” following a meeting with President Barack Obama.
“These are very small steps in the right direction,” said Kate Warne, investment strategist at Edward Jones in St Louis. “The more evidence there is that Congress will make a decision sooner, the more likely we are to see stocks rebound.”
Investors have been concerned that if no deal were reached to modify automatic spending cuts and tax hikes, the U.S. economy could slip into recession. The S&P 500 has dropped about 4 percent over the past two weeks, in part due to these worries.
The Dow Jones industrial average added 45.93 points, or 0.37 percent, to 12,588.31. The Standard & Poor’s 500 Index rose 6.55 points, or 0.48 percent, to 1,359.88. The Nasdaq Composite Index gained 16.19 points, or 0.57 percent, to 2,853.13.
For the week, the S&P was down 1.5 percent, its second week in a row in the negative. The Dow lost 1.8 percent, down for the fourth straight week, while the Nasdaq was lower for the sixth week, also off 1.8 percent.
The MSCI world equity index recovered in late trading to trade little changed at 317.64 but has lost 1.7 percent this week.
The FTSEurofirst 300 index of top companies shed 1.04 percent to 1,067.45 and posted its worst week since late September.
Benchmark Brent crude oil prices rose above $109 a barrel as a showdown between Israel and the Palestinians in Gaza stoked worries about supply. Investors were concerned that Arab producers may be drawn into any potential conflict, which could impact supply lines.
Adding to worries, a fire broke out at an oil and natural gas platform in the Gulf of Mexico, the U.S. Coast Guard said. It told local media the platform was not actively producing.
Brent crude rose 94 cents to settle at $108.95 a barrel. U.S. oil gained $1.22 to settle at $86.67.
The yen fell for a third day against the dollar and posted its worst weekly loss since mid-February as expectations of aggressive monetary easing from the Bank of Japan continued to curb the currency’s appeal
Japanese Prime Minister Yoshihiko Noda paved the way for a snap election on December 16. The lower house of parliament was dissolved on Friday.
Shinzo Abe, leader of the main opposition Liberal Democratic Party and seen as likely to be Japan’s next leader, on Thursday called for the country’s central bank to adopt interest rates of zero or below to spur lending.
“The basic driver is still the interest rate differential between the dollar and yen, which is very narrow, and we have to wait for what happens after the (Japanese) elections,” said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.
The U.S. dollar was up 0.2 percent at 81.26 yen.
The euro continued its downward drift as concerns over Greece’s debt struggle and Europe’s stagnant economy weighed. It was down 0.3 percent at $1.2739.
U.S. Treasury debt prices rose, with yields touching their lowest levels in over two months on skepticism over whether Washington will produce a deal to avoid a budget crisis and worries about fighting between Israel and the Palestinians.
The benchmark 10-year U.S. Treasury note was up 4/32 in price to yield 1.581 percent.
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Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.