On Tuesday the S&P 500 made a new bull market high, which put the index up 70% since the March 9th low. In just two days, the folks in Washington have done a number of things to stop this rally dead in its tracks and put the recovery in question. Ever since the Scott Brown Senate victory, politicians on both sides of the aisle have become stressed out about their personal futures, and they are now beginning to change their tunes. In poker, they call this "playing on tilt," and right now it seems like many down in DC are on tilt.
First, there is now a worry that the Senate will have a tough time raising the debt limit. There is likely no shot that this won't happen because its implications would be dire for the U.S., but nevertheless, it is a very unpopular topic right now and even a hint of a failure to pass this can get investors nervous. Second, questions are surfacing over whether or not the Senate will be able to confirm Bernanke. It is also likely that the Fed Chairman will eventually be reconfirmed, but investors are comfortable with Bernanke, and any doubts regarding his status are worrisome (after comments from both sides of the aisle today, maybe it isn't likely anymore). Finally, the administration launches an all-out attack on Wall Street, seemingly acting tougher towards bankers than terrorists. Many large-cap Financials took it on the chin yesterday (as shown below), and an attack on Wall Street is essentially an attack on the stock market since those working in the Financial sector are the ones making the majority of investment decisions. (On a side note, we find it quite amusing that the government made sure it exited most of its positions in financial firms before announcing its new proposals.) And given the fact that more than half of Americans own equities in some form or another, an attack on the stock market is an attack on Main Street. Something needs to be done about "too big to fail," but rather than work together, the administration seems to have unilaterally decided on what needs to be done without consulting any of the parties involved. Based on Barney Frank's comments yesterday, it also appears that members of Congress in the President's party were also left in the dark. Add these three things up and you get a two-day decline of 3% for the S&P 500 and a break below the 50-day moving average this morning. While there are some other things at work contributing to the declines (China worries, dollar rising), we believe the majority of it is due to what's going on in DC.
It is likely that none of the three things mentioned above will even play out, so we're treating the sell-off as a short-term correction that will offer buying opportunities. However, it's never good to get investors riled up and leave them in a state of uncertainty, and that's exactly what Washington has done this week.
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