November 4, 2012
There's an old saying among investors that the markets hate uncertainty.
So it's no wonder investors sold stocks Friday as they awaited the outcome of Tuesday's presidential election. They will be relieved if the election provides a hint of the next phase of the U.S. economy and the route politicians might follow to control the government's debt. But with the election tight and campaign rhetoric vague, significant questions could remain beyond the election.
The Federal Reserve's latest survey of bank senior loan officers "suggested that businesses are increasingly putting on hold investment decisions just in case Congress allows the 'fiscal cliff' to hit," said Paul Ashworth, economist with Capital Economics. "Banks reported that the demand for business loans has declined."
The fiscal cliff involves about $800 billion in tax increases for individuals and businesses, plus government spending cuts that could erode sales for companies, especially in the defense industry. Tax increases for all taxpayers and spending cuts are set to happen automatically at year-end. Politicians can stop them, but only if they find the courage to deviate from old promises after the election and compromise.
If the full force of the tax increases and spending cuts hit in early 2013, the economy is expected to go into a recession. That's a lot of uncertainty. Add to it the aftermath of superstorm Sandy. Analysts continue to estimate the damage. For example, Citigroup retail analyst Deborah Weinswig noted Friday that mall traffic on the East Coast declined 11.1 percent Oct. 28 while people awaited the storm, and then it declined 33.5 percent Monday and stayed soft as people skipped discretionary shopping through the week.
Despite uncertainty, U.S. economic data last week was more encouraging than had been expected, and investors grew more confident about emerging market stocks, too, after an uplifting report on purchases by business in China.
"The recent rebound in the (Institute for Supply Management) manufacturing index has corresponded with some improvement in activity overseas," said Paul Dales, of Capital Economics.
The U.S. employment report Friday also provided modest encouragement.
"The payroll employment results were much better than expected," said Morgan Stanley economist David Greenlaw. "But the rest of the data was somewhat disappointing."
While there was an increase in people participating in the workforce in October, and payrolls jumped 171,000, economists did not like what they saw below the surface. Companies were not increasing the hours they kept their employees at work, and earnings remained stagnant.
The jobs numbers "show gradual signs of healing," Greenlaw said, but "the employment rate is likely to improve only grudgingly going forward from here." He noted that, on average, job growth has been about 157,000 jobs a month in 2012 — almost identical to 153,000 a month in 2011. That's not enough to bring the unemployment rate down quickly.
With many large companies reporting slowing sales during the third quarter, investors turned cautious in October, and the Standard & Poor's 500 index declined 0.85 percent for the month.
The nervousness drove investors back into dividend-paying stocks, and they sold nondividend payers, noted Bespoke Investment Group. The stocks with the highest yields rose an average of 0.23 percent in October, while the S&P 500 stocks that pay no dividend declined 3.37 percent.
"The domestics held up while the big internationals got slammed," according to Bespoke.
Despite uncertainty in the U.S., investors have been feeling more cozy with U.S. stocks.