Market Commentary - 11.7.12

2012 Election Results

U.S. equity markets traded broadly and sharply lower in "day-after" election reaction as investors digested the outcome of the hotly contested presidential race that handed a second four-year term to President Obama. The S&P 500 Index lost 2.4% on Wednesday, November 7th, the worst decline for the U.S. benchmark equity index since June 1st – when it lost 2.5%. To be fair, Wednesday's market selloff cannot entirely be ascribed to the president's re-election as European stocks also ended sharply lower after the European Commission dramatically cut its 2013 euro-zone GDP growth outlook to 0.1% from 1%. Even so, Wall Street has been paying close attention to the 2012 elections due to their wide-ranging economic and business implications. First, let's recap how the president managed to pull off a victory.

In exit polls conducted by Edison Research, President Obama won re-election along most all of the same demographics as he did in 2008. With a win in Ohio (50.2% to Romney's 48.2%) becoming his electoral college clincher, Obama won his 303 electoral votes by carrying the majority of the female vote (55%), 18 to 24 year olds (60%) as well as blacks and Hispanics (93% and 71% respectively). Former Governor Mitt Romney found favor among senior citizens (55%), whites (60%) and males as well as those identifying themselves as Independents (49%). In terms of income, the incumbent president took the majority vote from Americans making less than $50,000 per year, while Mitt Romney won a larger percentage of voters with annual incomes over that threshold.

No Mandate Challenge
The U.S. electorate showed America is even more divided than it was four years ago, as the popular vote differential between the political parties' standard bearers was just 25,000 - in President Obama's favor, out of over 99 million votes cast. The President's near repeat performance in capturing another term again pits him against a divided Congress with Republicans retaining majority status in the House of Representatives 231-190, while Democrats retained power in the Senate 51-45. The near "status quo" election results now has investors - and American businesses - focusing on the so-called "fiscal cliff" as one of the most critical issues facing the nation.

Year-End "Fiscal Cliff" Issues Threaten Stocks and the Economy
In agreements stemming from the last federal debt ceiling negotiations, Congress and President Obama agreed to impose a set of automatic tax increases and mandated governmental spending cuts to begin in January. Unless the legislative and executive branches of government can compromise to avoid such actions, the resulting $607B of combined and adverse effects threatens to push the U.S. economy over the proverbial "fiscal cliff." Today's selloff was a realization that, if left unchecked, Democrat's tax proposals could have an adverse effect on stocks as well. Understandably so, when you consider the fiscal cliff tax plan specifically calls for dividend-income tax rates going from 15% to 39.6% (for those earning over $200,000 a year) and from 15% to 20% for capital gains. The second concern is increased costs within the private-sector considering the further 3.8% surcharge on investment income under Obamacare.

Looking Forward
With federal compromise, or the lack thereof, the forward looking watch-word, we see increased market volatility as the inherent consequence to the likely unfolding year-end tax negotiations. We also believe the Obama victory makes it more likely that the Federal Reserve will continue to implement their clearly dovish policy that should keep interest rates exceptionally low through mid-2015. Our outlook therefore continues to favor allocations to equities, within the scope of individual investment objectives, while underweighting exposures to developed-nations' international stocks relative to those within the United States. While spread product relative to Treasury securities remains attractive, we particularly believe a diversified portfolio should also include exposures into alternative-oriented investments, in which fund managers have freedom to react quickly to volatile market conditions.

This information compiled by Cetera Financial Group is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment.

No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

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