A Waiting Game

For the most part, investment experts are unwilling to go out on a limb with predictions until the election is over. Analysts might be willing to suggest a certain response from Wall Street if President Obama secures a second term, or an alternative response if Romney captures the vote, but many note that the real issue is the unresolved government budget crisis. Until Congress and the White House can reach some sort of agreement on budget cuts, many investment gurus believe we’ll see no real shift in long-term investor confidence.

And so while we await the election results, we continue to see some seesawing in the equity markets. September’s positive performance in the markets was buoyed by the Federal Reserve’s announcement that it intends to continue its quantitative easing stimulus program. Some analysts grumble that the Fed’s bond buying program appears to have provided more underlying support to the stock market than to the economy overall. They cite the apparent disconnect between international politics, domestic economic woes, and lackluster corporate earnings versus equity indices that are closer to their highs than their lows. They note that a similar pattern is under way in Europe under the auspices of the European Central Bank. To these analysts, the divergence suggests that while the markets seem to believe the Fed is on the right track, there is a risk that the economy won’t make good on this optimism.

Not all analysts view the situation the same way. Traditionally, the market leads the way out of economic downturns, and many Wall Street observers are holding fast despite some disappointing earnings news.

Market responses frequently appear to defy logic, and that has been the case recently. Third-quarter earnings reports have been disappointing. As of Oct. 25, third quarter earnings were down 3.9 percent year-over-year with revenue up 0.4 percent, according to Thompson/Reuters. Significantly, 90 percent of Standard and Poor’s 500 companies have said their fourth quarter revenues will be lower than Wall Street’s original consensus. The technology and industrial sectors are forecasting a particularly tough fourth quarter. Yet despite all this information, analysts have been slow to revise their forecasts. The reasons why remain obscure, but it’s probably because there are so many unknowns at the moment, including the election outcome and the fiscal cliff, which will push the United States into a crisis if a decision on spending cuts and higher taxes cannot be reached.

The remainder of the year is looking good for some sectors, especially health care and the defense industry. In this climate of divergence and contrarian thinking, it should come as no surprise to know that companies posting good third-quarter results saw their valuations rise a tick, but that those who missed their targets were punished more severely. After the elections, some of our questions will be answered; but the market’s logic will always keep us guessing.

The comments above are intended as general observations only and are not intended to replace the advice of professional investment and tax advisors.

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