By now, we all know the results of Tuesday’s elections:
President Obama won the right to serve four more years in the White House thanks to narrow victories in several swing states. But he didn’t get a compelling majority in the popular vote. Democrats retained control in the Senate, while Republicans will remain in charge of the House of Representatives.
So what does it mean?
Fasten your seatbelt! I believe these results are downright bearish for many stocks and for the broader economy! That’s because we’re stuck with the same poisoned political and economic environment today that we’ve had for the last couple of years!
Get Ready for More Gridlock,
Duty-Shirking in D.C.!
It’s no secret that the U.S. faces substantial long-term challenges. Our debt load is roughly $16.2 trillion and counting … $211,000 for every family of four in America. Adding in obligations for Social Security, Medicare, and other long-term promises we’ve made, and the real tally is more like $120 trillion!
Meanwhile, we just closed the books on yet another year with a 13-figure budget deficit. The $1.1 trillion in red ink was a slight improvement from the year or two preceding it, but still a huge sign of budget recklessness!
What we need is a political environment in Washington, D.C. that is conducive to civility, practical deal-making, and actual productive work. But the elections didn’t deliver any of that! Instead, we’re stuck with more of the same: The most divided, most partisan, do-nothing Washington environment ever!
==> It’s the environment that resulted in the 2011 debt ceiling debacle and the U.S. losing its “AAA” rating at Standard & Poor’s. In case you don’t recall, that crisis led to the Dow Jones Industrial Average plunging 2,100 points in 19 days!
==> It’s the environment that led to multiple rounds of “can kicking” on tax and spending policy — and a complete inability to come up with a long-term fix for our government debt and budget deficit problems. We now have less than two months left to deal with the fiscal cliff, without a change in the political dynamic that led to the cliff’s creation!
|A divided Washington must quickly come together to avert the looming “fiscal cliff” that threatens to push the U.S. economy into a recession.|
That means we could be facing major increases in taxes, deep spending cuts in sectors like defense, and the prospect of more credit ratings cuts from S&P, Moody’s, and Fitch.
Indeed, Fitch came out the day after the elections and warned there is “no fiscal honeymoon for President Obama.” It said if Congress and the President can’t reach a deal to avoid the cliff, plus come up with a plan to deal with the deficit over the longer term, then it would strip the U.S. of its AAA rating.
==> It’s also the environment that has allowed the U.S. Federal Reserve to run wild, pursuing the most reckless monetary policy the world has ever seen!
What This Means to You
as an Investor
On Election Day and for a few hours overnight, we got a brief “Phew, we actually managed to elect SOMEBODY without a bunch of lawsuits and delays” rally in stock futures and risk assets. But before long, stocks, copper, crude oil, risky bonds, REITs, utilities, and other risk assets fell sharply. The Dow ended up losing 313 points — its biggest decline in a year!
It doesn’t help one bit that the euro currency is breaking down sharply again thanks to lousy economic news out of Germany. Nor does it help that European Central Bank President Mario Draghi came out and warned that the euro region is still facing economic challenges.
Bottom line: The continuation of the political status quo makes it much more likely to me that we go over the fiscal cliff! It also makes it more likely that dividend taxes go up, another negative for many high yielding stocks. No wonder the Dow Utility Average collapsed this week, breaking down to the lowest level since late April!
We took out 1,400 on the S&P 500 on Wednesday. Then on Thursday, we collapsed through another key support level around 1,380. To me, this is signaling that the problems I’ve been warning about for some time are really coming home to roost. We could easily lose another 100 points or more in the S&P, and the bubble in risky bonds could pop in spectacular fashion.
So make sure you’ve taken the protective steps I’ve outlined. If you want more specifics, you can also check out my Safe Money Report. I have already implemented strategies that will minimize the damage of a post-election, fiscal cliff disaster. And they could help you too — for just 13 cents per day! If you’re interested, click here.
Until next time,