It is easy, I suppose, to see yesterday’s market rout as a response to the re-election of President Obama, but that would be a mistake. Clearly, there is angst in the market now that the election is over and the so-called fiscal cliff is looming even larger. As well, Mario Draghi’s comments and the ECB’s evaluation of the EU economy contributed to yesterday’s slide. Although the market oversold quite a bit yesterday, expect more selling in the near term. Fear and uncertainty are now primary drivers. Yet, don’t panic, as I believe the market is setting up for a big move when the fiscal cliff issue is resolved. This will take some, though, so be prepared for an erratic market over the next month or so.
I just reread what I wrote. It sounds reasonable and seems so sensible, but the truth is anything can happen now that the US is, in fact, back to square one. The country has a democratic president and a divided congress and that could well mean gridlock to the point of serious market angst, much as we saw after the 2010 elections and the run up to the deadline for the debt ceiling. Yet, the political reality now is much different than it was back then.
Back then, the new Tea Party members of Congress believed they had a mandate to do what they did and their numbers (60 some) gave them a certain power. This election might well have tempered their enthusiasm for wreaking havoc on the economy and the market in pursuit of their deeply believed ideology. For one, their numbers are fewer. Two, their candidates for the US Senate and the US House of Representatives suffered serious defeats across the country, and three, the Republican Party now understands that if it wants to hold the House two years from now, it must contribute to a solution rather than obstruct a president.
I believe this new political reality will both soften the discussion over the next two months and it will lead to a practical and effective compromise on the fiscal cliff issue. Now, it might be that part of that compromise is actually letting the Bush Tax Cuts expire at the end of the year so the Republicans can offer up and join in on a tax cut for the middle class in January. And it might be that letting spending cuts go into effect in January is symbolically necessary to jump start the spending cuts process, but it is highly likely both parties will join in to “save” the US economy from the massive cuts projected to shrink the US military quickly and the US GDP up to 2%.
All of this conjecture leads to two important considerations for market players. The first is that panic is not necessary in the next two months and the second is that the next two months could provide awesome opportunities to both trade the market and invest in the market. I see the next two months as truly opportunistic.
And yet another question from a reader on energy …
- Can you help me understand the reason for resources/energy drop since QE3 was announced?
It does seem counterintuitive, doesn’t it? It is good news, though. Finally, the energy market, (and I think you mean oil), is paying more attention to economic fundamentals. The economic slowdown in China, the end of the US driving season, declining demand from higher fuel efficiencies, the increase in production, and inventory buildup suggest my statement is true, as the price of oil has steadily dropped since QE 3 was announced. In fact, the supply and demand fundamentals are so powerful now that the events in Syria and Iran seem to have little affect on the price of oil. Now, how about that?
Trade in the day; Invest in your life …
