Recession is finally here. A near 45 percent plummet in the market from its 14,000-point high in spring 2007 and the pending outcome of the 2008 election has Americans puzzled and downright panicked as to where the economy is headed next. The markets are heaving volatility around the globe. Major financial institutions are crashing while small businesses are suffering because banks refuse to lend. The question now on everybody’s mind is what Washington is going to do about the growing economic crisis. The truth, however, is the powers that be in Washington are at the forefront of the recent market panic. Politicians are using doomsday tactics to sway the attention of voters and, for the most part, it is working.

The stated aim of the presumptive next U.S. president is to raise considerably the capital gains tax, among other negative market actions. It is this perception that has investors so frantic. To dodge a potential tax increase on their profits, investors have engaged in a major sell off, causing stocks to move increasingly lower, thus further feeding the already engorged fear on Wall Street.

Eventually, those with taxable gains fearing the loss of profits will have already sold their stocks and fled the market. We should be near the point when bearish pressures start to diminish. An indicator of this is October 10’s head and shoulder bottom (or triple bottom). It is indicative of a pending change in the direction of the market. This indicator is correct approximately 70 percent of the time. This is important to consider given the fact the market had an almost 650-point turn around on October 10. This is more remarkable than any other one day turn around because of the weekend (Japan will have a holiday on Monday).

A triple bottom tells us the market tried three times to make a lower low, but failed. Historically, when this has happened, it implied the market was oversold and ready to reverse direction. Conversely, when you have a triple top it means the market has tried three times to make a higher high, but failed, thus indicating the market has nowhere else to go but down.

The message I am attempting to convey is much of the excess selling is the result of investors selling stock early to avoid a loss of profits due to the reigning presidential candidate’s proposed capital gains tax increase. Consequently, the sell off has caused unsophisticated and uniformed investors to become increasingly panicked and, therefore, dump all of their stocks.

For now, as supported by the triple bottom in the market on October 10, the odds favor a change in the direction of the market. This does not necessarily mean the change is for the long-term. That would depend on whether banks will provide liquidity via lending. The best investment strategy for now is to stay on the sidelines until it becomes clearer as to who will be elected into the presidency in November.

This brings me to one final thought: Depending on who is elected president, the balance of power established by our forefathers may come to a crucial halt. The next president could very well have a Congress majority higher than that ever recorded in U.S. history or close to it. Most of our checks and balances outlined in the Constitution would be rendered void.

The only check that would remain if the leading candidate is elected into office would be the Supreme Court. However, many members of the Supreme Court are old and will most likely have to be replaced in the near future. Therefore, the president will likely have the opportunity to appoint enough members to the court to displace the conservative majority, thus annulling the last check on the powers that be in Washington.

Sincerely,
Kenneth Coleman