The election is over. We now know that Barack Obama will be President for another four years. We also know that we will continue to have a divided congress. For the last few months, as traders, we have been trying to make trades (or stay out of the markets) based on what may or may not happen as a result of the election, and even though we cannot predict the specific legislation that will be passed, we know who the major decision makers will be.
No matter which candidates you supported, it is now time to take a step back and look at the markets objectively. All of your hopes and aspirations for individual politicians has to take a backseat to your analysis of which policies they support and how well they will be able to tackle the challenges ahead.
We know that energy prices are high, interest rates are low, and economies around the world are still hurting. Although we have had a drop in the reported unemployment rate over the past few years, we also know that many workers have accepted lower paying jobs and most households are still earning less than before. So, with these facts in mind, what is the proper trade right now?
Well, after the election, we saw an immediate drop in the indices, which may have been a result of the approaching “fiscal cliff”. Congress put off this discussion until after the election, and now the time is here to make some tough choices. Markets like certainty, and if Washington gives us certainty on a budget over the next few years, the markets may experience some stabilization. The big fear of the markets is that there will be a temporary solution to the problem and real solution will not be reached in the short term. This may cause more volatility in markets, thus reducing the risk that investors are willing to take, opening the doors for more money to be taken out of investments. This fear may take a toll on all investments: stocks, bonds, commodities, and forex. The only thing that will be acquired during this process is the US dollar.
But even though uncertainty may be the trigger, a bear market may not be the result. Time and time again we have seen Washington step in with stimulus, and this may be no exception. Between billions of dollars in stimulus funds and quantitative easing, we saw a potential bear market averted because of government support. Of course without the hopes of another presidential term on the line, this may not be a given this time around.
So, as you scan your charts, I would be more bearish than bullish, but I wouldn’t expect an all our crash. I think there is more room to the downside currently, but I also know how politicians act to avoid bear markets these days.