In the last three years, the market has risen from the depths of despair reached in 2009. Just last month, the market flirted with surpassing its all-time highs in the S&P 500 and the Dow. In between, the market has survived many threats, including the totality of the European fiscal crisis, the possibility that Greece would collapse, thus threatening the EU, and the US debt ceiling debacle, which resulted in the downgrading of the US credit rating for the first time it its history, to name just three. The resilience of the market is immense.
Today, another threat is affecting the market. Arching over the mood of the market is the possibility the US might not overcome the political stalemate regarding the so-called fiscal cliff, the combination of expiring tax cuts in combination with untenable spending cuts coming December 31st. This combination of taxes rising and huge cuts in federal spending threatens to knock the US back into recession, which would then derail any forward movement on the US unemployment rate and potentially fracture the seemingly fragile global economy.
Will the market survive this latest threat? More than likely, the US politicians will understand the immensity of the problem at hand and will deliver an acceptable solution, but nothing in life is ever guaranteed, save death and taxes and more of the latter is assured in any deal, at least for those who own some 50% of the equities in the stock market. Currently, many who gained much this year in the stock market are taking and will take profit to avoid the potential of higher capital gains taxes in 2013. This selling is providing and will continue to provide a downward bias in the near term.
The market dislikes many things. It tends to react negatively to fear and it often panics, whether the fear is real or hyperbolized; but when it faces uncertainty, it tends to act like a deer caught in the headlights of a car. It freezes momentarily and then darts one way or the other. This has been the behavior over the last month or so and then last week, it darted to the downside, more than likely reflecting the selling referenced a moment ago.
Until the US politicians pull together a solution to the fiscal cliff, expect the market to behave erratically. Understand, though, that if the market perceives the “solution” as inadequate, you should expect the market to behave badly, perhaps for some time.
Given that the US Congress has a little over two months to fix this issue, the political rhetoric will come soon. This will contribute to the volatility and it might even increase the volatility. On top of this, news from Europe and China will push the market one way or the other. Add to this spinning mass the forthcoming US economic data and the retail data looking toward the holidays and the forecast is for choppy seas.
As every trader and investor knows, the decisions you make depend on your conclusion about the future regarding the fiscal cliff. If you believe US politicians will fail to resolve the issue satisfactorily, then you go to cash to wait it out. If you believe they will provide a satisfactory solution, then the next two months are both a trading and investing opportunity. If you believe the latter, then look to near-term movement for that opportunity. Look to VantagePoint for near-term market movement in a market ranging from potential correction to one in a volatile form of stasis.
