By Matt Jarzemsky
Strategists expect a rocky few weeks for stocks, as investors'
attention turns to whether a divided government can address
fiscal-policy issues by the year's end.
Economists have said falling off the "fiscal cliff"--more than
$600 billion in federal tax increases and spending cuts set to kick
in if lawmakers can't reach a deal to avoid them by the end of the
year--could send the U.S. back into recession. For some stock
investors, the challenge recalls last year's budget fight, which
led Standard & Poor's Ratings Services to downgrade the U.S.
credit rating and set off wild swings in stock prices.
"Obama gets to say now, 'I campaigned on raising taxes, and I
won,' " said Dan Greenhaus, chief global strategist at BTIG LLC.
"That complicates things when you have a Republican House [of
Representatives] that sees things differently."
Mr. Greenhaus said that, when it comes to his expectation for
stocks' direction in the coming weeks, "the easy answer is,
'Down.'"
Stocks sold off Wednesday, sending the Dow Jones Industrial
Average 267 points lower in early-afternoon trading. The rout pared
major benchmarks' gains for the year. So far in 2012, the Dow is up
6.2% and the Standard & Poor's 500-stock index has climbed
11%.
"There is broad agreement that there will be volatility
associated with conflict over the fiscal cliff, and I think there's
a lot of pessimism about the ability of Washington to come to an
agreement," said David Kelly, J.P. Morgan Funds' chief global
strategist.
To be sure, not all market watchers expect stocks to continue to
fall. As of the end of last month, Wall Street strategists, on
average, expected the S&P 500 to rise to 1411, according to a
Birinyi Associates survey. That is a little above the index's 1401
level Wednesday afternoon but would amount to a gain of 12% for
2012.
J.P. Morgan Funds' Mr. Kelly expects politicians to reach an
agreement by early next year, he said. He sees stocks as offering
better prospects for returns than bonds, given their still-modest
price relative to earnings.
"For investors, the important thing is, just don't get caught up
in the day-to-day," Mr. Kelly added. "Don't try to play the waves
when you know which way the tide is going."
The undercurrents of Wednesday's selloff reflected investors'
take on winners and losers after the election, strategists
said.
Shares of coal companies, thought to benefit from a Romney
victory, tumbled. Peabody Energy Corp. (BTU), the largest U.S. coal
producer by output, fell 9.2% in early-afternoon trading.
The Market Vectors-Coal exchange-traded fund (KOL), which tracks
the sector, tumbled 5.5%, putting it on pace for its biggest drop
since November. Coal stocks had rallied on Oct. 4 after Mr. Romney
said in a debate he would "make sure we can continue to burn clean
coal."
Some corners of the health-care industry also gained amid
reassurance that President Obama's signature health-care overhaul
would stand. HCA Holdings Inc. (HCA), the biggest for-profit
hospital operator, jumped 8.8%. Hospitals are expected to benefit
from rules that would lead to coverage for more Americans.
Financial shares in the S&P 500 saw the biggest decline
among the index's 10 sectors, as hopes for less burdensome
regulation under Mr. Romney dissipated.
Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com
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