Analysts see hope despite swoon in post-election stocks

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Tuesday's elections left Washington's power structure intact, a status quo outcome that helped to send Wall Street to its worst loss in a year and raised the spectre of more partisan gridlock between the White House and Congress.

The fact that the same elected officials who chose a temporary, draconian blend of $1 trillion in budget cuts and tax increases over a permanent solution to mounting federal budget deficits have been returned to office gave investors pause Wednesday about owning stocks at prices intact before the polls closed Tuesday.

That was one explanation for Wall Street's post-election hangover Wednesday, when leading market indexes fell more 2 percent. Other pundits in the exasperating business of explaining Wall Street's daily gyrations offered ongoing problems in Europe and investors cashing in on investment gains before an anticipated increase in capital gains tax rates as other plausible explanations.

"We just can't afford to have four more years of stonewalling," said Malcolm Polley, chief investment officer of S&T Bancorp's Stewart Capital Advisors unit. "If they do nothing, we have automatic tax increases and automatic spending cuts. That's the easy route and ultimately that might be what happens."

Despite the re-election of many of the same cast of characters, there are clear winners and losers from Tuesday's election. The winners include the stock market, Wednesday's swoon notwithstanding.

That's because Mr. Obama's re-election cements the low interest rate policy engineered by Federal Reserve Board Chairman Ben Bernanke. Republican presidential candidate Mitt Romney had said he would not have reappointed Mr. Bernanke, whose term expires in 2014.

While the stated purpose of the Fed policy is to stimulate economic growth, one of its biggest impacts has been driving investors toward stocks and other risky assets that offer more generous returns than interest-based securities.

"It's hard to overemphasize the Fed's influence in supporting markets," said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott. "It really speaks to the continuation of buying risk assets, things like corporate bonds instead of U.S. Treasuries.

John Frankola of Vista Investment Management in Pittsburgh expects families that earn more than $250,000 a year will pay higher taxes on their investment income. But despite that, he expects stocks will be more attractive than other investments.

"I wouldn't be surprised if a week from now, [the market] recovers," he said. "A week from now, I wouldn't be surprised by wherever it is."

The same may not be true for coal stocks, which posted deeper declines than the broad market Wednesday. Mr. Obama has pushed for tougher environmental regulations on the industry, an effort Mr. Romney and other industry supporters describe as a "war on coal."

"Clearly, regulation is a concern for manufacturers," National Association of Manufacturers president and CEO Jay Timmons said in a conference call with journalists Wednesday.

He said the U.S. Environmental Protection Agency, the Securities and Exchange Commission and other regulators "have to change the way they're operating and the way they're doing business."

The Dow Jones industrial average fell 312.95 to close at 12,932.73, off 2.4 percent. It was the first time the widely watched index closed below 13,000 since Aug. 2. The S&P 500, a broader gauge of the market's health, also fell 2.4 percent to finish at 1,394.53, off 33.86. The Nasdaq tumbled 2.5 percent, closing off 74.65 at 2,937.29.

Among Pittsburgh-area stocks, Cecil coal and natural gas producer Consol Energy fell $2.17 to close at $33.28, off 6 percent. Mining equipment maker Joy Global finished at $59.43, down $4.29, and specialty metals producer Universal Stainless & Alloy Products closed at $33.53, off $2.43.

Some are optimistic about the chances of Mr. Obama and Congress working together to avoid the fiscal cliff -- a term coined to describe what happens if the automatic tax and spending cuts occur. Mr. Timmons said the prospect of those cuts already has reduced economic growth 0.6 percent this year.

"There will have to be some compromise because the markets won't tolerate any other solution," said Don Linzer, CEO of Schneider Downs Wealth Management. Downtown. "If tax rates go back to where they were before the Bush tax cuts, you have a big drain on the economy that could put us back into a recession."

Mr. Polley said chances the automatic spending cut and tax increases will send the economy back into a recession make it more likely that Congress will engineer a temporary fix and take up a longer-term solution next year. John Engler, president of the Business Roundtable, agreed. The group represents the CEOs of major U.S. companies.

Mr. Engler wants Mr. Obama and Congress to agree to a one-year extension of the Bush tax cuts and a "grand bargain" next year that would address spending reform as well a tax reform. Mr. Obama should put forward a plan for addressing those issues, he said.

How warm of a response the president would get is open to speculation.

"Republicans may have to take a wake-up call and compromise. Maybe they'll recognize that being the party of do-nothing white men doesn't get them anywhere," said David Frengel of Penn United Technologies, a Butler County tool and die maker.

But Mr. Polley thinks House Republicans, restricted by Tea Party conservatives who oppose any tax increases, may need some prodding.

"There has been an unwillingness on both sides to give, and I think Republicans in the House would like some kind of olive branch," he said.

Despite the broad, post-election market decline, Mr. Frankola said history shows Democratic presidents have been better for stock market investors. Wall Street fell 486 points the day after Mr. Obama was elected in November 2008, a time when markets were already in a free fall because of the global credit crisis that caused the bankruptcy. But in the four years since then, markets have bounced back about 40 percent, giving Mr. Obama one of the best records of any president, Mr. Frankola said.

Before the election, many economists forecast that the U.S. economy would continue its slow, steady recovery no matter who was elected. Mr. LeBas said that's because there only so much Washington can do about problems in Europe and emerging markets that are deterring growth at home.

"Many of the forces coursing their way through the economy are bigger than the president or Congress can control," he said.

nation - businessnews

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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