There's No Reason for Stocks to Rise Any Time Soon
NEW YORK ( TheStreet) -- The initial reaction to President Obama'a re-election was expected.
Prior to the showdown last Tuesday night, the price of gold was bid up sharply during the day session. Clearly, the biggest reason behind gold's turn of fortune -- after trending lower for weeks -- was the notion that the current administration, if re-elected, would continue along the same path of bigger government and bigger spending, leading to a weaker dollar. Get ready for QE4, QE5 -- maybe beyond. Who knows?
Because of the struggling economy, it is extremely likely the Fed will continue to expand its balance sheet in some manner. In theory, this should continue to drive risk assets higher as investors are forced to turn to equities and commodities to generate a meaningful return that can keep up with inflation. I emphasize "in theory."
The reality is, the nasty sell-off we have seen since last week and risk aversion across asset classes are not a direct result of Obama's re-election. It plays a role, sure, but this selling has been a long time in the making.
Many of my colleagues had discussed for weeks the idea of a Romney win being a positive for stocks and commodities and an Obama win being a negative. I would say they are partially correct. The initial knee-jerk reaction to the outcome was clearly negative, and I do believe that had Romney won, we would have seen stocks and commodities rally. That rally would have proven to be temporary, however. Nothing and nobody could have stopped this.
The wheels were set in motion a long time ago. What has been interesting to watch is the degree of selling. One need only look at Wednesday's volume to clearly see there was conviction behind it.
Regardless of who is in the White House, we are all staring down the barrel of a loaded fiscal gun. We are all vulnerable to a Greek default, or a run on European banks. We are all going to have to deal with artificially inflated asset prices that occasionally will have the wind knocked out of them. Our economic fortunes are now directly tied to China -- it's unfortunate, but that's the reality.
It is impossible to say exactly what markets are likely to do in the coming months given the outcome last week. The dollar continues to stay strong. In fact, it has been trending higher. Given the amount of headwinds now facing stocks, and the economy, I think a continued period of selling is in store. We are seeing technical breakdowns in the stock indices, and other risk assets such as crude oil. A trip down to 1,200 on the S&P 500 is a real possibility. We could easily see oil drop another 10 bucks a barrel as demand and sentiment continue to erode. Notice I say "could."