PowerTrend Brief: Trading Election Uncertainty for Fiscal Cliff Uncertainty

As we all are well aware now, the 2012 presidential election is over, and President Obama will remain in office for the next four years with control of the House retained by the Republicans, while Democrats continue to rule the Senate. With that overhang now eliminated, the near-term focus of the stock market has shifted to the “fiscal cliff” and whether or not a deal to avert the looming potential sequestration and tax hikes can be struck before they take effect Jan. 1.

In the mind’s eye of the stock market, more than a fair amount of uncertainty exists. Most, if not all, investors recognize that nothing prompts stock market anxiety and volatility more than uncertainty. The recipe of items that need to be dealt with near term — the fiscal cliff, tax reform, slowing domestic and international growth to name a few — appear to have given the stock market a quick case of winner’s remorse. The day after Election Day, all of the major stock market indices fell sharply lower, with the Dow Jones Industrial Average falling more than 350 points at the session’s lows to cross well below the 13,000 line. The S&P 500, my preferred market index due to its wider breadth of companies that comprise the index, fell 2.4% and the Nasdaq Composite Index dropped 2.5%.

Helping to fuel that view of uncertainty in the stock market was a new report on the fiscal cliff issued by the Congressional Budget Office (CBO). The report stated that the fiscal cliff would drive the U.S. economy back into recession next year and result in a jump in the jobless rate to 9.1% by the end of 2013. The CBO explained that economic output would drop by 0.5 percentage points in 2013 if Congress and President Obama fail to act to avert the tax increases and spending cuts put in motion by an earlier deficit agreement. The assertions in that new report are nothing new as the CBO forecasted earlier in the year that the U.S. economy could fall into recession next year if nothing is done to avert the fiscal cliff.

The big political question coming out of last week was whether or not the Left and the Right can come together to work out a solution in which both sides can claim victory. As we inch closer to the fiscal cliff deadline and wait for a viable deal to be struck, companies will hope for the best, but plan for the worst. Past a certain point, that means guidance will be cut, capital spending reviewed, hiring frozen and layoffs contemplated, if not announced.

Already, companies are starting to announce layoffs, as are state and local governments. Boeing (BA) announced it would lay off 30% of the executives at its Defense Operations and job cuts also were announced by Pratt & Whitney, Perkin Elmer (PKI), Bristol-Myers (BMY), Corning (GLW) and others. Soon after Election Day 2012, the Richmond Daily reported that Gov. Bob McDonnell declared that effective immediately, Virginia state agencies must be prepared to cut their budgets by 4%. State agencies in Virginia are to propose their cuts by Nov. 21 — the day before Thanksgiving.

In short, prospects for a rebound in layoffs, pressured disposable income, and contracting spending by consumers and corporations will curb growth prospects and limit stock appreciation in all but a few sectors. As we have seen in the past, when it comes to any potential deal in Washington to prevent a crisis from occurring, the devil will be in the details. In the December issue of PowerTrend Profits, I delve deeper into the “fiscal cliff,” its impact and how investors should be positioning themselves.

In the coming five trading days, politics and the fiscal cliff will continue to a market driver. On the economic data front, we get a handful of consumer, inflation and manufacturing data. The October reading for retail sales will be complimented by the smattering of retail companies — Dick’s Sporting Goods (DKS), Home Depot (HD), Ross Stores (ROST) and The TJX Companies (TJX) among others — reporting their quarterly results this week. Also in the coming trading days, we’ll hear several management teams from D.R. Horton (DHI) and Beazer Homes (BZH) offer their latest take on the domestic housing market.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

Here’s a closer look at what investors should be watching and listening to during the next five trading days:

Monday, Nov. 12
Beazer Homes (BZH)
CTI Industries Corp. (CTIB)
D.R. Horton, Inc. (DHI)
Hologic, Inc. (HOLX)

Tuesday, Nov. 13
Cisco Systems (CSCO)
Dick’s Sporting Goods (DKS)
Elbit Systems (ESLT)
Home Depot (HD)
Harris Interactive (HPOL)
Jacobs Engineering Group (JEC)
Michael Kors Holdings (KORS)
Saks Incorporated (SKS)
The TJX Companies (TJX)

Wednesday, Nov. 14
MBA Mortgage Index (Weekly)
Retail Sales (October)
Producer Price Index (October)
Business Inventories (September)
FOMC Minutes (October 24, 2012)
Alvarion Ltd. (ALVR)
Abercrombie & Fitch (ANF)
Hot Topic Inc. (HOTT)
Meritor Inc. (MTOR)
Network Appliance (NTAP)
PetSmart, Inc. (PETM)
Spectrum Brands (SPB)
Staples (SPLS)
Tyco International (TYC)
Williams-Sonoma (WSM)

Thursday, Nov. 15
Initial & Continuing Jobless Claims (Weekly)
Consumer Price Index (October)
Empire Manufacturing Index (November)
Philadelphia Fed Index (November)
Applied Materials (AMAT)
Aruba Networks (ARUN)
The Buckle (BKE)
Bon-Ton Stores (BONT)
Cosi Inc. (COSI)
Dell Inc. (DELL)
Dollar Tree Stores Inc. (DLTR)
Dole Food Company (DOLE)
GameStop Corp. (GME)
Gap Inc. (GPS)
Intuit Inc. (INTU)
Limited Brands (LTD)
Perry Ellis International (PERY)
Ross Stores (ROST)
Sally Beauty Holdings (SBH)
Sears Holdings (SHLD)
SINA Corp. (SINA)
Target Corp. (TGT)
Viacom Inc. (VIA)
Wal-Mart Stores (WMT)

Friday, Nov. 16
Industrial Production (October)
Capacity Utilization (October)
Ann Taylor Stores (ANN)
Casual Male Retail Group (CMRG)
Footlocker Inc. (FL)
Hibbett Sports, Inc. (HIBB)
The J.M. Smucker Company (SJM)