Thursday, November 08, 2012

Fiscal Cliff Fears Founder the Market

The post-election sell-off is becoming a serious concern. The S&P 500 is down 3.6% in just the two days following the election. This is a clear indication that investors are not happy with the election results. President Obama remains in the White House, the Senate continues to be dominated by Democrats, and Republicans control the House. In other words, nothing has changed. This recipe did not do the economy much good during the past four years. Right now, there is no reason to believe that the next four years will be any better. There is a real fear among investors that politicians will fail to reach a resolution on the fiscal cliff. The sell-off in the market is not the vote of confidence President Obama and his team in the White House were hoping for.

Today, the S&P 500 closed below its 200-day moving average. Those who follow such technical factors would consider this is an extremely bearish signal. Another bearish signal is the sell-off in Apple, the largest company by market capitalization in the S&P 500 and one of the hottest stocks in recent years. Apple is the bellwether stock of today's economy. Unfortunately, Apple is down 23% since hitting its closing high on September 19!

I explained on this blog back in March why I wasn't buying Apple. At the time, the stock was already above $600 per share. However, I said sentiment could take it even higher. It did. Yet the recent sell-off in Apple demonstrates how a simple turn in sentiment can devastate a stock. There is no change in the fundamentals. Apple still makes great products and it is still expected to generate tremendous sales growth. Some investors are actually justifying the sell-off by saying that since Steve Jobs passed away, Apple is just not the same company it once was. But Jobs died over a year ago. I can't believe investors suddenly woke up to this news.

Thanks to the sell-off, Apple is becoming very attractive. By most measures, it is not an expensive stock. On the contrary, it offers great value. Based on my conservative discounted cash flow analysis, I would value Apple at about $600 per share. On a more realistic basis, it is worth closer to $700 per share. Even so, negative sentiment could drive both Apple and the market lower.

At this point, however, I think there is a good chance for an upside surprise in the markets. Politicians on both sides of the aisle seem to have discovered a new sense of urgency to resolve the fiscal cliff. I am even sensing that the Republicans will relent on some tax increases in exchange for tax simplification. I once told Steve Forbes I would be willing to pay a little more in taxes if I could fill out and file my own return in half an hour. The market will rally even if there is no concrete agreement signed before January 1. All it will take is for investors to believe that a real resolution is in the works.