FYI | Nov 02 2012
By Peter Switzer, Switzer Super Report
There are always plenty of critical issues to worry about in this money-making game. However, it’s the fiscal cliff in the United States that worries me most for my shorter-term trading actions.
There are heaps of big issues with a longer maturity date and that includes the China slowdown, the European debt/recession challenge, the overall US long-term debt problem and the timing of when the mining boom will really go bust.
To be frank, I think we’ll muddle through most of these events over 2013 and stocks will go higher.
BlackRock’s Bob Dole has tipped US stocks to rise 10% next year and Goldman Sachs is also on board with higher share prices.
By definition, both these influential market players mustn’t be spooked by the approaching US fiscal cliff over the longer term and I think they are right. A solution has to come before January 1 and I’m sure it will, but there could be some huffing and puffing after the election that could worry investors until some 11th hour solution shows up.
What is the fiscal cliff?
The fiscal cliff is a description of what might happen to the US economy if existing tax cuts and spending measures disappear automatically on New Year’s Day if Congress fails to agree on a new plan. The end-result would be an eradication of demand for the US economy, pushing it over a ‘cliff’ into recession.
This is because these mandated changes would cause a 19.6% increase in revenue to the US administration and a 1% cut to spending at a time when the economy still needs stimulus. Tax collected would go from 15.7% of gross domestic product (GDP) in 2012 to 18.4% of GDP in 2013, which is close to the historical average. This will look good on the books, but it will cause a recession!
So Wall Street will watch the Congress’s arguments after the election like a Labrador eyes off a sausage at a BBQ! And if investors don’t like the way things are going, stocks could be sold off.
On the flip side, if the negotiations are mature and sensible it could contribute to the end-of-year rally I’m expecting based on the belief that US politicians couldn’t be so silly as to allow the economy to slump into recession.
Political analysts say the Republicans are in the box seat in terms of the Senate and so Democrats are likely to be more likely to be in a compromising mood after the election, but I’d say a Romney win in next week’s poll would make for smoother negotiations over the fiscal cliff.
Right now the Democrats control the Senate, but it’s a slim margin of 53-47 and of the 33 seats being contested 10 are held by Republicans and 23 are Democrat positions. Many of these are historically Republican having switched with the Obama wave of popularity at the last poll.
In the House of Representatives, the Republicans hold sway at 242-190. The Democrats are not expected to take the House.
My bet
In a perfect world for stock markets and the US economy, Romney would win and the Republicans would take both houses of government, which would mean this group of politicians would be responsible for pushing the economy off the cliff – and that would never happen.
Of course, there is something called a Presidential veto that KO’d a bill put forward by Congress, but I could not see Obama doing anything that would lead to the economy going over the fiscal cliff.
That’s why I can’t fall over or fall for this fiscal cliff fear talk.
My bet is that ‘cliff anxiety’ on top of ordinary company results could bring stocks down a small degree, which would be a buying opportunity, before another rally starts when Bing Crosby starts singing “I’m Dreaming of a White Christmas” in department stores across the USA.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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