What I’m Watching This Week – 19 November 2012

Cliff Hanger

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.

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