This year we have rallied 10% on the S&P 500. No matter how you look at the numbers, that is an impressive rally. But has it run too far? Companies like Apple (AAPL) are up over 60% YTD. Some homebuilders like Pulte Homes (PHM) have nearly doubled since January. Its safe to say that large cap value stocks provided a phenomenal rate of return if you bought in January. Now there seems to be some serious issues that could put the brakes on those gains.
The presidential election is sadly the leading indicator when it comes to what the market will do. During the ’08 election, the market began to price in the fact that Obama was leading the polls going into the election. At that time, the market wanted him to win. They thought he had the ability to get our country out of the recession quicker than McCain would. This time around, Wall Street desperately wants Mitt Romney to win the election. Why? Romney would help Wall Street with the financial regulation that they are facing under Obama. While the regulation may help limit the leverage Wall Street can have, and mitigate the risk of another financial crisis, it would hinder Wall Street’s ability to make more money. Mitt Romney’s background in business, and his financial status, will most likely push him to deregulate Wall Street and banks. As the election gets closer, if Romney is in the lead, we could see the S&P 500 go on a run. If Obama looks like he could win, the S&P 500 could pull back anywhere from 10-15%.
The financial crisis in Europe, Greece possibly leaving the euro, and China’s economic slowdown could put some pressure on our markets as well. Remember, we still make more of some products than we need. In order to capitalize off of that, we export them overseas. If the world economy is too weak, our prices will be too costly for the rest of the world to afford. That would lead to countries turning inward to produce products domestically, and cut our exports drastically. With 50% of our nation’s exports coming from small businesses, that could be a chaotic scenario. Even with a certain slowdown in the world economy, if that is the only factor weighing on our markets, it could only drive them down 5-10%. That is barring any sort of massive collapse such as France or Italy defaulting, China’s GDP shrinking at a double digit rate, or Germany exiting the euro altogether.
The “Fiscal Cliff” in our country is something that has been a side effect of both the “Great Recession” and European Debt Crisis. With all of Europe realizing that they are spending more than they should, countries around the world have begun to look at their own balance sheets. Obviously the United States’ balance sheet hasn’t been pretty for a long time, and has only grown worse with three wars and bailouts. The Fiscal Cliff is more than just the debt situation in our country. It is also a revenue issue. Tax cuts expire, budgets expire, budget cuts get installed all at the end of this year. It could be quite a painful process if Congress doesn’t act. Yet, the likelihood that Congress does act fades more and more each day. If we do go over the proverbial “Fiscal Cliff”, we could see a short term pullback in the market that could resemble something along the lines of the “Flash Crash” spread out over a month or two.
While there is no sure way to avoid any of these events happening, there are ways to try to preserve your 401k in the last part of this year. If any of the above situations happen, which at least one is more than likely, gold would be a great safe haven. When currencies around the world devalue themselves, gold usually has the opposite reaction and appreciates. It’s what is referred to in the financial world as an inverse relationship. Another good play to keep yourself safe would be oil refiners. The world will still need oil, no matter what type of shape the world economy is in. Those are two sure fire ways to help you avoid the sideshow that is sure to occur in the fourth quarter of this year.