Congress returned to work for a few days after the elections to begin ‘serious’ deliberations on the “fiscal cliff’ and other matters last week. This week they will be back on vacation recess. Pardon me while I clear my throat. Given that the country now has more clarity on the fiscal cliff issues due to the non-stop media coverage since the election, I still believe that a plan will come about rather quickly. There are specific consequences for taxpayers and the motivations have changed for all the accomplices this time around. I don’t expect anything like the theater of events that were the debt ceiling agreements.
U.S. financial market volatility continued last week, where all major U.S. equities indexes posted a fourth consecutive weekly loss. However by week’s end there were sparkles of confidence and I wouldn’t be surprised if this week provides the markets with a nice, moderate bounce into the holiday. As we begin to close out the month, we see that Job growth is better than we thought and the pace of job creation is impressive with about 6.9 million jobs for the quarter. Third quarter earnings improved in the final reports, however corporate revenues remained discouraging on a broad scale. The forbidding dark cloud on the horizon is the continuing Gaza Strip conflict and the greater risks to the energy markets and with no clear solutions from both Israel and Palestine, I do expect negative market reaction within the next few days if Israel moves forward with a ground assault into Gaza.
I remain optimistic. My conversations in the last few weeks have been dominated by one topic, “How to protect your portfolio from the fiscal cliff.” The fundamental context of this issue hasn’t been a secret. The best way to protect your portfolio is to construct the right asset allocation, there will always be market volatility, how you are positioned against and within that unpredictability dictates how you emerge on the other side after the turmoil subsides. If you are just now getting interested, the best place to start is with a conversation regarding this fundamental issue. I expect Congress to utilize all of 2013 to create a resolution to tax issues about the Bush-era tax cuts, capital gains and dividend taxes, the Alternative Minimum Tax and the Medicare ‘doc-fix’. Everything should be on the table regarding a revenue package. Hopefully gone are the days of ‘let’s not make a deal and say we did’. I’m optimistic and cautiously encouraged.
An eye-opening moment
With great fanfare, the big news of the week was that finally the Silly Season has ended; to the winners go the spoils, to the loser…soul searching. The election essentially unspoiled the status quo and now the frenzied media, realizing that there’s no real story to be had there anymore, attention immediately shifted to the impending “Fiscal Cliff.” Ahem, dear media, by the time you hear the sirens, it’s already too late. You’re about as useful as a football bat. Anyone paying attention has followed this issue for months, literally.
For the record, I sincerely believe, that with the election results being what they are and as the demographic and political landscapes are forever changed, that the real possibilities of a “Grand Barging” being achieved in the next few weeks / months are entirely realistic. Yes, we still have the same moronic players in the Congress but the circumstances are different if not historic. The consequences for non-action will touch nearly every segment of American society in regards to increasing taxes. I would not be shocked to see specifics emerge before the end of the month as the adults in the room finally decide to speak up.
Last week other big news was the highly volatile markets. Wednesday opened with a severe move downward and gave us a 2% down day on the heavy volume. Thursday carried the markets further to the downside and by Friday’s closing bell; all of the major U.S. equity indexes were negative by more than 2% on the week. The S&P 500 closed below 1,400, the Dow Industrials below 13,000, the NASDAQ below 3,000, and the Russell 2000 below 800. It wasn’t only the political candidates who were made slack-jawed immediately after the elections. Can it be called the Obama pullback? It’s no secret that Wall Street wanted different electoral results however I reason to suggest that Europe held significant sway over last week’s market actions. And by the way, there’s more of that to come, I suspect as European economic reports showed further deterioration. Mario Draghi’s (European Central Bank’s President) comments regarding Germany on Wednesday actually sent the European market into a tail spin which in turn took down the US Market.
I remain optimistic. While some in regards to the election results, will sulk and murmur “What went wrong?” they really should be wondering why they were the last to know. How they did not see it coming is what is astounding. The same can be said for our Fiscal Cliff. The time to ignore reality and remain in an information free cocoon must come to an end. Had enough with the conclusions from the ideological hacks, and their self-imposed, fantasy land of disinformation to the masses? The American public sent a clear indicator of their risk off sentiment. Americans voted against this nonsense and it ought to be an eye opener for many that hopefully won’t be quickly forgotten. I remain optimistic, cautious and conspiracy free.
How many changes in direction are you realistically supposed to tolerate in one week? Wednesday through Friday we witnessed dramatic market movements across the broad indexes. The markets appeared to be waiting, then panicking and then again waiting. Granted, the unpleasant impact of Hurricane Sandy added a new level of uncertainty to an economy moving slowly towards recovery; last week’s economic data was respectable on the corporate earnings fronts. Private sector payroll numbers, with the August-September upward revisions, were favorable, as was the upward gains in personal spending and in consumer confidence. Internationally, eleven of 12 major markets turned positive, significantly. Based on valuations, European, Asian, and Brazilian equity markets are becoming more eye-catching. Comparatively, these foreign markets are cheap versus U.S. equities.
Internationally, with unemployment running above 25% in the twelfth largest economy in the world, the European Central Bank (ECB) has made it clear that it won’t let Spain collapse, as that would be the lighting of a fuse that would explode what is now known as the European Union. As for another troubled country in the EU, specifically what needs to be paid attention to are the actions of the Greek parliament, as they are set to vote on new austerity measures and the 2013 budget. If those measures don’t pass, the next tranche of bailout money from the ECB will not be given to Greece and the country could go bankrupt in November. Not as calamitous as Spain going into a death spiral but a Greek exit from the Euro and a return to the drachma would no longer be unforeseeable in the near term.
I remain optimistic. The ongoing hiatus of U.S. business investment where deferred decisions reign supreme and cash is stacking up is about to end, I sincerely have a confident feeling. Businesses will receive certainty from the election (even if they don’t get the rules or politician they want). I expect a period of each party licking their respective wounds and realizing that now that the silly season is over, it’s way past time to get to work for the American people. I’m optimistic and confident for the week ahead.