Today’s rally in stocks should be viewed as a reflex rally – one based on the (faulty) reasoning that because stocks went down prior to the election, they are cheap and now that the election is almost over, they must be a good buy. Stocks did not go down because of the election, they went down because earnings for the third quarter were weak. They are not cheap. And there is no reason to be optimistic, regardless of who wins the election. Stock valuations are still very expensive, given the weakness in the economy and corporate profits. We still face the fiscal cliff – the expiration of the Bush-era tax cuts, the imposition of spending cuts that were approved as a result of the raising of the debt ceiling – and the problems in Europe that will not soon fade. Remember how contentious the debates were, especially among the Tea Party Republicans, when the debt ceiling was raised? Remember that they missed the deadline and government basically shut down. Markets got hit hard… etc, etc. These same politicians are likely to fight even harder to make sure those spending cuts go into effect as scheduled. They may also fight any efforts to extend the Bush tax cuts. The CBO (Congressional Budget Office) has already stated that, if the Bush tax cuts and spending cuts go into effect, we will have a recession in the first quarter or 2013.
With all of this uncertainty, this is no time to be aggressive about investing cash. Just the opposite. The prudent action is to not take any action, hold cash, protect assets, reduce portfolio risk, and wait.