The 1987 crash. The Y2K bug. The debt ceiling debacle last year.
All these events, in the end, turned out to be buying opportunities for stocks. 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 1.45 percent to 1,359.88, the narrower Dow Jones Industrial Average fell 1.77 percent to 12,588.31 and the NASDAQ gave up 1.78 percent to 2,853.13.
The S&P 500 is down more than 5 percent in the seven sessions that followed US 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 US economy back into recession.
MEDIA HYPE?
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 on 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 this year. That has been halved to about 8 percent, which is not 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 US$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,” Kumar said.
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 next year. 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 US debt ceiling, which led to the downgrade of the US’ top credit rating in early August last year.
During the dealings, the S&P 500 lost 18.8 percent between its peak in July and its bottom in August last year. 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 Jan. 1 next year, setting the stage for today’s fiscal cliff crisis.
After staying flat through September last year, the S&P 500 jumped 31 percent between its October low and the end of March.
NEGOTIATIONS
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 on Friday they would work through the Thanksgiving holiday recess to find a solution.
“The debate over how to solve [the fiscal problem] may be more productive than is commonly recognized,” said Brad Lipsig, senior portfolio manager at UBS Financial Services in New York.
“The US 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,” Reynolds said.
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