Week Ended November 9, 2012

"Fiscal cliff" worries drive stocks lower

Stocks finished sharply lower for the week amid poor economic data from Europe and worries about the approaching year-end "fiscal cliff" in the U.S. The major indexes fell to their lowest levels since late summer. Mid-cap stocks held up somewhat better than other asset classes.

Day after election sees sharp drop

The bulk of the week's losses came after Tuesday's U.S. elections largely maintained the status quo in Washington, DC. While voters gave President Obama a second four-year term, the House of Representatives remained strongly in Republican hands, increasing concerns that a deadlocked administration and Congress would fail to stop the federal spending cuts and tax increases scheduled to take place starting in January. Failure to achieve a compromise prior to the start of 2013 could sharply cut GDP growth next year. While some also worry that an increase in the top capital gains tax rate next year may drive high-income investors to sell stocks and harvest gains before year-end, T. Rowe Price analysts detected little tax-related selling so far.

The pattern of Wednesday's sell-off also appeared to reflect assessments about the likelihood of continued regulatory reforms. For example, energy firms, particularly coal producers, fared poorly, as did financial firms that are subject to new regulations. Within health care, hospital stocks held up relatively well, while medical device makers, which will face new fees under the health care reform legislation passed in 2010, posted sharp declines.

Worries drown out encouraging economic data

Worries over the fiscal cliff drowned out largely encouraging reports about the U.S. economy. Weekly jobless claims declined, although a closure of unemployment offices and other disruptions following Hurricane Sandy may have been partly responsible. More significantly, perhaps, the U.S. reported a decline in its trade deficit to the lowest level in nearly two years—a surprising result given that relatively strong growth in the U.S. should be expected to boost imports and weigh on exports. Instead, exports reached record levels.

While increased shipments of farm goods deserved part of the credit for the rise, the resilience of U.S. exports in recent months may partly reflect the increasing competitiveness of U.S. manufacturers. T. Rowe Price managers are keeping a close eye on what some believe is a "manufacturing renaissance" in the U.S. brought about by cheap energy, the need for shorter supply lines, and other factors.

Europe's troubles spread to Germany

Conversely, poor European economic data added to worries. Germany reported on Wednesday that manufacturing output had contracted by 1.8% in September, the worst showing since April. The European Commission slashed its 2013 growth outlook for Germany to 0.7% from a forecast of 1.7% six months ago and also cut its growth forecast in the eurozone to 0.1% from 1.0% in 2013. The slowdown deepened worries that the eurozone's slump was spreading to its largest economy, which has held up relatively well in the face of the Continent's sovereign debt crisis.

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

¹Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

²The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.