Wall Street has not been kind to recently re-elected President Barack Obama: Since November 5, the morning after his victory, the Dow Jones Industrial Average has dropped some 300 points.
The reasons for the selloff aren't yet clear, but they send an unenthusiastic sign to the White House. Concerns about the fiscal cliff, the country's long-term finances, and a belief that a Mitt Romney administration would have been better for corporations has traders in a bearish mood.
Bill Allen, vice president at Charles Schwab's Private Client Investment Advisory, says this mood is likely to extend into the coming months. "You answered one question with the election, but people are beginning to realize pretty quickly that there are other problems that don't have answers," he says.
That's likely to keep traders on edge in the short term. And until uncertainty subsides, investors are in for a bumpy ride.
Hope on the fiscal-cliff front, but other concerns loom. One good thing to come out of the election, Allen says, is hope that the fiscal cliff can be avoided. "After what happened with the debt ceiling and the incredible drama around that, I don't think anyone wants to replay that," he says, referring to last summer's fight over the national debt and subsequent credit downgrade. "People are realizing the fiscal cliff and all that it entails--the immediate consequences of not dealing with this are extremely severe."
However, even if the fiscal-cliff issue is settled, a number of other challenges remain. Europe has slipped back into recession, and its sovereign debt crisis is far from resolved. At the same time, there are lingering questions about the strength of the Chinese economy.
Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Va., says she has been telling clients that the election would not dictate the direction of the economy, and preparing them for volatility. "The president doesn't take away the uncertainty. We have been hammering on this for half a year," she says. "We're doing as much as can without knowing what's going to happen."
Avoid succumbing to fear. Schwab's Allen says it's important for individual investors to keep a cool head until these issues are sorted.
"The individual investor reacts to emotions, by and large. Uncertainty and volatility drives people to fear. Your emotional reaction then tends to be avoidance," Allen says. "We're trying to have [investors] embrace the fear, but we're [telling] them that this is not the time to be putting your head in the sand."
Allen says the keys to withstanding markets like these are preparation, patience, and planning. Prepare by talking with a financial adviser about your short- and long-term plans, and how to execute these plans in the current market environment. Be patient through the ups and downs of the market. And don't abandon a plan based on market fluctuations. "Create your plan and have the fortitude to stick through it," he says.
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Kirchenbauer is also advising most clients to sit tight through the current market. However, she suggests that people with short-term goals get the cash to accomplish them. "We are taking a proactive approach about anyone who needs cash. We're not going to wait out this market," she says.
Allen adds that investors should be especially well-diversified in international stocks, as many of the problems facing the world economy are not rooted in the United States. "We still want clients to have broad diversification and that includes international exposure. Don't make bets on countries or regions," he says.
A clear direction? Both Allen and Kirchenbauer say it's not yet clear when the current uncertainty in the market will disappear. "For our clients, generally, they are feeling a bit more optimistic. People slowly have been starting to build on optimism," Allen says. "But it's hard to be optimistic when you don't have a job, you're seeing your leaders bicker, your debt keeps wracking up. We'll all feel better when we put the partisan stuff aside."
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According to Kirchenbauer, there are a growing number of positive economic trends, and consumers are generally feeling better about the direction of the market. But a clear course toward greener pastures is far away. "The trends are moving the right direction--they're just moving very slowly. It's not quick enough for all of these people who have been out of work. And we have businesses sitting on their hands ... A year from now, we'll have a much better sense of where we're going," she says.
But Kirchenbauer adds that many of her clients are moving forward with life plans that have been on hold due to the tepid economic recovery. "In general, consumers are spending. We're moving on with our lives. The investor and the consumer are fed up with the slow recovery," she says.
Her advice for them: "Focus on what you can control. You can control your spending. You can control your job choices. You can decide to start a family. Trying to figure out where the tax code is going to be and where the market will go is impossible."
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