Wednesday, November 7, 2012

Beating Those Post Election Blues

As you might imagine, I've been getting lots of calls today about the investment implications of the elections. 

Wall Street is already casting its verdict - the market is down almost -2.5% this morning, making it one of the largest drops this year.

I have been urging clients to focus on what we actually know, and not on fears of what may or may not happen in an Obama second term

As we approach the close of the third quarter earnings season, there has been a constant theme of "miss on revenues, beat on earnings" from corporate managements.  Most commentary has been cautious, as would be expected, but the actual data has been encouraging.

Here's what Merrill Lynch wrote earlier this week:

3Q earnings update: EPS exceeding both our & analysts' ests. 

Last week, 105 S&P 500 companies reported results, bringing the total to 378 (or 82% of 3Q earnings). More companies posted positive EPS surprises in Week 4, with the majority of companies in Consumer Discretionary, Consumer Staples, Financials, Health Care and Tech all beating analysts' bottom-line forecasts....
Unless EPS results deteriorate meaningfully from here, 3Q will no longer see a YoY EPS decline, which would have been the first time this occurred since 2009. Additionally, Non-Financials earnings are now only expected to decline only 1% YoY this quarter, compared to expectations of a 3% decline when reporting began. 
and revenue beats picked up a bit in Week 4 

Overall, 52% of companies have beaten on EPS, 37% have beaten on sales, and 26% have beaten on both. Reporting trends improved across all categories in Week 4, with 53% beating on EPS, 41% beating on sales and 29% beating on both.

Housing is clearly picking up, and auto sales remain robust.  U.S. energy costs remain among the lowest in the world, and U.S. wages are also competitive. Corporate America is in good shape.

Stocks are also reasonably valued relative to history.  However, compared to the alternatives - bonds and cash - stocks remain incredibly attractive.

Dividend yields on many high quality companies are higher than most investment grade corporate bonds, offering appeal for income-oriented investors.

Company balance sheets are stuffed with $1.6 trillion of cash reserves, which not only will act as a buffer for any economic downturns but also could be a catalyst for M&A activity.

Finally, regardless of how you voted yesterday, it is worth noting that Obama has actually been pretty good for stocks.  The S&P 500 has more than doubled from the time he took office, albeit off a very depressed base.  Despite what might have been said during the campaign, there doesn't seem to be a lot of evidence that he is anti-investor.

It is also good news, in my opinion, that Ben Bernanke will finish his second term. The Fed Chair has been a friend to the investor, even if his policies were not necessarily targeted to the stock market.

Governor Romney had indicated that he would have replaced Bernanke, but it would now appear that Bernanke will stay in place for a couple more years at least. Short term interest rates will still low until at least 2015, and the monetary spigots will remain wide open.

My real concern is that fact that nothing has really changed in Washington: Democrats control the White House and the Senate, while Republicans still are the majority in the House.  The lack of bipartisan cooperation makes the danger of the "fiscal cliff" more real, with its concomitant negative impact on the economy.

Hopefully cooler heads will prevail, and some sort of budget agreement can be reached before year-end.