Market Preview: The Hardest Part
Sam Stovall, chief equity strategist at S&P Capital IQ , noted a rather disturbing similarity between Wall Street's reaction to President Barack Obama winning a second term and Harry Truman's surprise victory in 1948.
"Both 1947 and 2011 were pre-election years in which the market ended the year almost exactly where it started," he wrote in emailed commentary on Monday. "Cooperation between Congress and the President was rare, and the traditional third-year 'priming of the economic pump' before the election was absent. As a result, 1947 and 2011 are the only pre-election years since 1900 that recorded 0.0% price changes, versus the more normal 11.1% gain, which is twice the average return for years 1, 2 and 4 of the presidential cycle."
In 1948, after Truman was famously able to overcome Thomas Dewey, the S&P 500 lost 11.7% through the end of the month, erasing its 9.7% year-to-date gain prior to the election, a fact that doesn't bode well for the index's performance this November.
"In 2012, the S&P 500 advanced 13.6% year to date through Election Day, on a projected 12-month improvement in the global economy and corporate earnings, and Wall Street‟s hoped-for replacement of a seemingly unpopular Democratic president or the swing to a Republican majority in the Senate," Stovall said. "Wall Street got neither election outcome, so it took its ball and went home."
He continued: "Should the market experience a 1948-style response to this year‟s election outcome, the S&P 500 could fall to 1261, or only four points above where it started the year. In that case, let's just hope the historical comparison plays out, as the S&P 500 advanced 3.1% in December 1948 and 10.3% for all of 1949."
Meantime, Deutsche Bank's David Bianco was sticking to his guns after last week's ugly sell-off, reiterating a 12-month target for the S&P 500 of 1500 and advising investors to use this recent dip to scoop up growth stocks with the potential to lift their dividends.
"We still believe that the fiscal cliff will be averted with compromise legislation, but President Obama's reelection and a larger Democrat majority in Senate raise the likely amount of tax hikes vs. spending cuts in the new legislation," he said, adding later: "Political rhetoric may extend the sell-off, but a correction (S&P less than 1320) is unlikely unless negotiations fall apart."
Wall Street seems set to take the temperature on fiscal cliff talks on a daily basis from here, meaning a rocky end to 2012 is likely in store because negotiations like these tend to go down to the wire.