Let me tell you how it will be,
There’s one for you, nineteen for me.
‘Cause I’m the taxman…
And you’re working for no one but me.
– George Harrison, “Taxman”
I wonder how the “Quiet Beatle” would have reacted to last Tuesday’s election results; in my opinion, not as sharply as we did on Wall Street. But, then, he had firsthand experience with truly high tax rates and, I suspect, we will not. He played music, we play trump cards.
Since the re-election of President Obama, the S&P 500 has dropped almost four percent (about three percent if the inexplicable rise on Election Day is included). There are a number of proposed reasons for this decline, some of them politically charged, some of them not. In my opinion, it seems to be something of a market tantrum, not caused as much by the re-election of the president as by the prospect of governmental gridlock and a drop off the “fiscal cliff.” It appears that the “stock market enforcers” have to go to work again.
I had assumed we were beyond all this. With the announcement of the third round of quantitative easing (QE3), I thought the trading range might be behind us. European austerity seemed to be becoming less austere. China appeared to be on the mend. The American consumer remained open for business and even the American housing market seemed to be clearing. With investors still skeptical about long-term growth, open-ended positive monetary pressure for the Federal Reserve should have supported us until some sort of budget compromise could be adopted.
While I think that reasoning still makes sense, it now appears that we investors may have to apply some more pressure to accomplish that last item, and that pressure may have to take the form of rapid (and, hopefully, short-lived) equity price declines. As the bond market’s intolerance of inflation ultimately defeated inflation 30 years ago, the stock market’s intolerance of delay in dealing with political issues can force the issue today.
Strategists must use current fundamentals to predict future stock market actions. Politicians have it easier; they get to use current stock market actions to predict future fundamentals. What happened to equity prices last Wednesday and Thursday hopefully sent a clear message about the future issues that will result if a compromise on taxes, spending, and the budget is not achieved. I am hopeful that the message was heeded, but am confident that it will be sent again and again if it was not.
With that in mind, we are adjusting our outlook for the S&P 500 for the next 14 months to a projected range of 1,300–1,600. We realize this is a bit broad, but note that the bottom end is our acknowledgement that an overshoot could occur if the market’s first warnings are not heeded. It would represent a nasty, brutish, and short correction of 10–15% from the recent high and serve to force the political compromises needed to avoid the fiscal cliff.
We suspect that all of this will be unnecessary. Quick corrections do not have to be deep to make the point. To demonstrate this, we are retaining our year-end 2012 target of 1,505 for the S&P. The point to be made is that the equity market has already forced progress on political issues around the world. We believe that it will do what is needed to finish the job. The only question is how much will have to be done to achieve this.
Leave a comment
Your questions and comments really matter to us! We're glad you want to join the conversation and connect with other AdvantageVoice readers. All we ask is that you keep some simple guidelines in mind:
Please Note
By posting content on this Blog, you expressly grant Wells Fargo (and its affiliates) the right to use or distribute the posted content in any form, worldwide, and in perpetuity. You also agree to indemnify and hold Wells Fargo harmless against all liabilities, losses, claims and expenses arising from your posting of materials on this Blog (this includes any claim that Wells Fargo's use of the content of images infringes on someone else's intellectual property rights). Please read our Community Guidelines for more information.
If you have immediate service needs or require a follow-up, please contact your bank representative or relationship manager. If you submit your email address, we will use it only if we need additional information about your comment, or if we need to contact you to resolve service issues mentioned in your comment.
Because this is a moderated site, your comments may not appear immediately. Thanks for your patience!