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As we’ve seen in today’s trading, the markets don’t seem too pleased with the outcome of last night’s vote. Not that the reelection of the president is responsible for all of the selling, but certainly it doesn’t help the bullish cause. One big reason for the selling is that with the uncertainty of who will be in power in Washington out of the way, investors and traders now are forced to look at the fundamentals in the economy, as well as the headwinds going forward, in making their decisions.
Now that we know who is in charge in Washington, we can turn to the realities that the leadership faces and those realities are both harsh and scary.
The biggest immediate headwind is the so-called “fiscal cliff,” a toxic cocktail of budget cuts to critical areas such as defense, combined with the end of the Bush-era tax cuts. The combined drag on the country’s gross domestic product (GDP) could be huge, and if the president and Congress fail to reach an agreement by January 1, 2013, then we all could be in a world of hurt.
Given the divided government that we elected last night, I suspect that the resolution of the fiscal cliff is further away than it was just yesterday.
As for the markets, we saw big selling in the major averages on Wednesday. Midway through the trading session, the S&P 500 was down more than 2%, and trading below the psychologically and technically significant 1,400 level.
Of course, the selling in domestic stocks hasn’t been just a phenomenon of today. In late October, the S&P 500 fell below its 50-day moving average. If things continue to fall, we will be very close to seeing the market break below the long-term, 200-day moving average — a very bearish signal for stocks going forward.
And it’s not just the S&P 500 that’s sold off hard of late. Some of the top stocks in the best sectors have fallen as well, including one of the market’s traditionally strongest stocks, Apple (AAPL). The chart below of the personal technology giant tells the tale of a company whose shares have plunged under heavy selling pressure since vaulting to its all-time high in September.
As you can see, Apple shares have broken down below the 200-day moving average, and this situation is not a good sign for the company, or the markets at large, going forward. Moreover, the stock is now officially in bear market territory, having declined some 20% off of its most recent high.
The bottom line here is that when leading companies in leading sectors get hit with a selling wave, it doesn’t augur well for companies with far less earnings prowess.
To be certain, it’s a precarious time in the markets. That means it’s essential for you to approach any investment with extreme caution. Make sure that if you have gains in the market right now that you act to protect those gains.
I have to share a few thoughts on what the next four years may bring now that the president has been reelected. For this, I want to present my friend and fellow Eagle Publishing colleague Nicholas Vardy, who recently provided what I thought was quite a brilliant analysis of what things might look like by 2016.
According to Vardy, who incidentally attended Harvard Law School at the same time as President Obama, the country faces the following uncomfortable outcomes during the next four years. Here are a few of the highlights from Vardy:
Economic growth averages a “new normal” rate of 2%; U.S. GDP in 2016 will be just $16.2 trillion, a tiny bit higher than the $15 trillion of today. The United States drops from seventh to 18th in the annual Global Competitiveness report, after falling from first in 2008 to seventh in 2012.
Our national debt hits $20 trillion by 2016, with the Debt/GDP ratio surging to 123% of GDP (the current ratio in Italy). S&P downgrades U.S. government debt in 2013 from its current single “AA+” to “AA-,” the same rating as Japan.
Vardy goes on to predict that taxes are going to rise across the board to pay for exploding government social programs and, of course, there will be a disproportionate increase in taxes on higher-income earners. As for employment, we are likely to see the headline rate unemployment remain in the 7-8% range until the president leaves office. There also likely will be an increase in “part-time” and “contract” workers, as employers take steps to skirt the costs associated with Obamacare.
As for the stock market, Vardy speculates that the S&P 500 essentially will trade around the same levels as it is trading today by the end of the president’s second term. This prediction is troubling, as it means that buy-and-hold investors could be faced with four years of essentially dead money in their stock holdings. That’s not a very appealing thought, nor is it something any of us want to experience.
My Top 10 High-Yield Funds
For the past several weeks, I’ve been providing you with various lists of ETFs that I consider to be some of the top picks in their respective genres and sectors. This week, I have another list for you, and it is my Top 10 High-Yield Funds.
In today’s investing world, high yield is all the rage. That’s because cash and cash equivalents pay nearly nothing, thanks in large part to the Federal Reserve’s policy of keeping interest rates at near zero, and the central bank’s QE3 policy, which intentionally keeps yields down.
The list here contains anything but low yields, as the yield column here clearly suggests.
If you’re looking to put high-yield funds in your portfolio, then start with this list. It should provide you with more than enough ideas to get your own high-yield watch list up and running.
A Jeffersonian Prognosis
“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”
I’ll leave it to the genius of Thomas Jefferson to express my thoughts on the outcome of last night’s presidential election. He already has done so better than I ever could.
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To the best within us,