S&P 500 Loses 3.22% Since US Elections Ended

The massive sale of equities that began shortly after the election continued last week. The S&P 500 has lost 3.22% of its value since the U.S. elections. The USD/CAD pair has remained confined to a narrow 70-basis point range, as traders wait for developments on the hottest topic right now: the fiscal cliff.

On Friday, President Obama met with John Boehner and other members of the House of Representatives to try and find common ground on what tax measures should be adopted. This would allow our neighbours south of the border to reduce their deficit and avoid going over the cliff. The two parties emerged from the meeting using a conciliatory tone, which allowed U.S. stock markets to rise at the end of the day.

Canada
Once again, not many Canadian economic indicators are on the program this week. The only major ones we will be watching are Retail Sales, expected Thursday, and the Consumer Price Index for October, due on Friday. Economists expect readings of 0.5% and 1%, respectively.

United States
This will be a four-day week in the U.S., as Americans will celebrate Thanksgiving this Thursday. We can therefore expect quiet, low-volume trading sessions on the markets (especially on Thursday and Friday) where the theme will again be the fiscal cliff. In economic news, Housing Starts for October will be announced tomorrow.

The pundits in this field are expecting a figure of 840,000, which is far from the low of 478,000 observed in 2009. Wednesday will be a very important day, as Ben Bernanke will be giving a speech at the Economic Club of New York, followed by the Michigan Consumer Sentiment Index and the Conference Board Leading Index figures will also be released.

International
The week in international news will be relatively quiet. It begins with the Bank of Japan’s decision on its key interest rate, expected during the night between Monday and Tuesday. About the same time, the Reserve Bank of Australia will release the minutes of its last meeting. It should be remembered that about two weeks ago, at its last meeting, the Reserve Bank left rates unchanged at 3.25%, due to encouraging signs in the Australian economy.

On Thursday we will know the Manufacturing Purchasing Managers’ Indices for China, France, Germany and the eurozone. The week will end with German GDP data, followed by the German Ifo Business Climate Index.

The Loonie
“The probability of ten consecutive heads is 0.1 percent; thus, when you have millions of coin tossers, or investors, in the end there will be thousands of very successful practitioners of coin tossing, or stock picking.” -Alan Greenspan

Almost two weeks have passed since the U.S. election and many analysts, both south of the border and here in Canada, have been weighing the odds of the fiscal cliff being resolved. Various factors need to be taken into consideration in order to map out potential scenarios. First, it should be stated that the U.S. fiscal situation, while a legitimate concern, is nevertheless less of a problem than what we are seeing in most European countries.

Even though they have comparable levels of public debt, the percentage of government revenues (from all taxes) as a share of GDP is far less in the U.S. (24%) than in Europe (between 40% and 50%). Even though there are a lot of resistances toward tax increases, the American government has considerably more room to manoeuvre. For example, the introduction of a 5% consumption tax (VAT) could solve the annual deficit problem.

The election revealed a major polarization in the vote by income bracket, with Obama obtaining a comfortable majority among citizens earning less than $35,000 per year, while Romney dominated the higher brackets. We can therefore expect very spirited debates in Congress. As we recently noticed, expected increases in the tax rates on capital gains and dividends, which affect more wealthy taxpayers, have been weighing down U.S. stock markets and buoying the USD for the last two weeks.

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