Making Money Alert: All Eyes on the Election, Earnings

The market still is digesting two of the biggest developments of the year, the European Central Bank’s (ECB) rescue plan for ailing EU nations, and the Federal Reserve’s pledge of “QE Forever,” an attempt to try and stimulate job growth, keep mortgage rates down and thus juice up the economy. This central bank-dependent milieu for stocks has resulted in a strong run higher during the third quarter.

Total return metrics for the most-watched major averages in Q3 include a 5.02% gain in the Dow, a 6.35% surge in the S&P 500 Index and a 6.54% climb in the NASDAQ Composite. The NASDAQ 100 added a very robust 7.18% during the quarter. A glance at the chart here of the NASDAQ 100 shows the tremendous run that began in earnest back in June.

Now that the Fed’s made its intentions known, and now that the ECB has put its “OMT” or outright monetary transactions plan in place, all eyes are turning to two major developments likely to influence markets.

The first is the presidential election, which really kicks into high gear tonight with the first of three debates between President Obama and Gov. Romney. If you’ve read news reports on recent polls, you get the sense that the president holds a slight lead among likely voters, both nationally as well as in several key swing states. Those polls could all change, however, depending on Gov. Romney’s showing in the debate tonight.

I think the bottom line here when it comes to the election is that the outcome is far from certain at this stage, and that means the uncertainty factor will likely keep a lot of money on the sidelines and away from stocks, at least until the first week of November.

The other factor everyone is watching closely is earnings. For the past couple of weeks, we’ve been in earnings pre-announcement season, and already we’ve seen many high-profile firms guide lower. In fact, by one count, more than 80% of Q3 earnings pre-announcements have been negative.

This “earnings recession” is something I am watching very closely, as it could be the catalyst for more selling in Q4—particularly once the unknown of the presidential race is gone. So, I want you to hang on to your hat for a bit, as I think the next month is going to be replete with a lot of watching, waiting—and worrying.

Thoughts on Intrinsic Value

“Paper money eventually returns to its intrinsic value – zero.”

–Voltaire

The current orgy of money printing by central banks around the world might be good for stocks in the short run; however, in the long run it’s likely to lead to a decimating debasement of the currency, an occurrence that’s happened many times in recent history. As Voltaire points out, paper money is essentially worthless, and that’s the fate likely for our current fiat dollars. For more on the harmful nature of money creation, go check out the great blog, DollarDaze. It’s certain to open your eyes.

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To the best within us,

Doug Fabian