Since the election, investors have turned their focus to the looming fiscal cliff and have sent stocks lower.(Photo: Henny Ray Abrams, AP)
Stocks are starting to get a major case of vertigo as investors stare down the fast-approaching fiscal cliff.
The Dow Jones industrial average and Standard & Poor's 500 index
fell to their lowest levels since June and July, respectively, on
Wednesday. In the Dow's case, it fell 185 points to 12,571 for the third triple-digit loss in little more than a week.
Investors see the risk lawmakers won't avert the fiscal cliff, which
would result in more than $600 billion in automatic tax hikes and
spending cuts, as an increasing likelihood.
Nasdaq composite fell 10.6% from its recent high, making it the first
major index to fall into the unofficial definition of a correction.
Investors are taking down the prices of stocks as they hedge their
bets that if leaders in Washington can't avert the fiscal cliff, a
serious downturn in the economy is more likely, says Hugh Johnson of
Hugh Johnson Advisors. "It's not hard to make the case we may be headed
to a recession," he says.
The market's ongoing woes are especially troublesome because of the:
• Severity of the declines. Not only are stocks sinking to
lows not seen in months, they're on an ugly path. Stocks have been
skidding since the election as investors braced for the victory of
President Obama to maintain political gridlock. The Dow has shed 675
points since Nov. 6, notching a 5.1% decline from Election Day. The Dow
and the S&P 500 are down 7.6% and 7.5% from their 52-week highs.
• A major index in correction territory. Tech stocks are
really taking a beating. The Nasdaq composite index is down 10.6% from
its 52-week high on Sept. 14, in large part to a sell-off in technology
stocks. Led by a 24% decline of Apple from its 52-week high price, the
technology sector is down 12.5% from its 52-week high.
• Lack of a profit renaissance to boost results. Investors
aren't getting any encouragement from corporate earnings, as the
third-quarter earnings season winds down. Of the 75 companies in the
S&P 500 companies to issue guidance about the current quarter, 51
are negative, says S&P Capital IQ. The ratio of negative forecasts
to positive is about twice the average over the past 10 years.
Investors shouldn't assume that the current decline is the start of
something worse, says Justin Walters of Bespoke Investment Group. Stocks
had fallen nearly 10% between early April and early June, but found
their footing and headed higher, he says.
Meanwhile, some stocks are getting reasonably priced, says Karl
Mills of Jurika, Mills and Keifer. "Some really good companies are
getting cheap," he says.