| Fundamental | Actual | Immediate Outlook | |
|---|---|---|---|
| Fixed-income: 10-yr Treas. | 5.0 | 1.63 | heading lower |
| Equities: S&P 500 | 2000 | 1378 | heading lower |
| Equities: Dow Jones | 16,000 | 12,811 | heading lower |
Elections have consequences. Stock prices reflect those consequences. Investment portfolios should shift to reflect the prospects for an extended period of slower growth followed by a period of higher inflation.
Market Outlook The President’s reelection has significant negative implications for the economy and financial markets. Most commentators and advisors are focusing on uncertainties associated with the “fiscal cliff.”
The fiscal cliff is a major problem. It isn’t the only one. There is also an $800 billion a year shift in spending from private to public purposes as a result of the full implementation of the President’s healthcare and regulatory agenda. This agenda will create serious problems over and above the coming tax hikes related to the fiscal cliff.
Stock prices are beginning to incorporate the implications. When the S&P 500 closed below major support 1396 on heavy volume, technical indicators turned more negative. This move justifies a short-term shift in stock portfolios from the near-maximum defensive position to a fully-maximum defensive position.
If your risk tolerance dictates a range of equities from 40% to 80% in your portfolio my recommendation is to be at the minimum of 40%. As a general strategy, I would recommend shifting more of an investment portfolio toward income generating investments and away from growth-oriented investments. Although tax rates for dividends and interest payments are likely to move higher, there are few good alternatives to current income given likely developments.
As for longer-term interest rates, recent developments show corporate rates are trending down. With my expectation of further weakness in stocks, I expect longer-term rates will continue to trend lower in the immediate future.
Sensitive Indicators There are relatively few signs of the widely reported pickup in business activity. Housing activity shows modest gains from highly depressed levels. Other sensitive indicators—new orders, commodity prices, initial unemployment claims—are flat to down. Coincident indicators are all over the map. However, averaging recent trends over a longer time period shows no improvement in the pace of activity.
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