The S&P 500 tumbled by more than 2 per cent this morning following the re-election of Barack Obama. Given that little in terms of investing fundamentals has changed since yesterday, this may prove to be a good buying opportunity – although one with larger-than-average risks.
Some parts of the selloff are an understandable reaction to last night's vote. U.S. health insurers are losing ground because the election makes it near certain that the President's sweeping health care reform will be implemented in 2014, putting a vise on the sector's profits.
Other parts of the stock slide also have good reasons behind them, although they have nothing to do with the election. At 10:30 a.m., the U.S. Department of Energy reported a 2.9-million-barrel rise in inventories, signalling much lower demand than had been expected. Energy stocks promptly headed south.
Economically, however, nothing much has changed in the past 24 hours and the market downdraft now appears overdone. The hard numbers, such as Friday's non-farm payroll gains, which suggest an accelerating economic recovery, have not been nullified by the election.
The most robust explanation for the selloff is the perception that an agreement surrounding the U.S. fiscal cliff will be more difficult to negotiate with President Obama in office, since he will have to face a hostile Republican majority in the House of Representatives. This theory would explain the significant weakness in defence stocks – Lockheed Martin is down more than 5 per cent and L3 Communications is trading almost as poorly – because failure to avert the fiscal cliff will create automatic spending cuts for the U.S. armed forces.
Yet another explanation for today's market slide is that it is a fit of pique on the part of some large investors who voted for the losing side. If so, they should regain their emotional equilibrium as soon as possible. The 200-day moving average for the S&P lies at 1,380.4, just a notch below the index's current level around 1,400.
A drop in the benchmark below its 200-day moving average would be an extremely negative long-term technical indicator for the S&P 500. Investors who are attracted by today's selloff should keep in mind the risk the market may hit that tripwire and fall even further.
Scott Barlow