Fear will be tested this week

Founder and Publisher of the Switzer Report
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Another week with the key parties in the fiscal cliff negotiations moving as fast as snails in a race towards a precipice where the outcome is unknown. It’s nearly like a storyline for an episode of the Twilight Zone – but it’s real!

In case you don’t know what I think about this fiscal cliff and what it could do to stocks, let me give you the worst case, believable scenario.

The best case is simple — a deal is struck this week before Christmas, US politicians head to their families for the holidays and the market continue a long Santa Claus rally. This rally rolls into January. But what about the worst-case scenario? This starts with no deal by December 31 and the stock market consequentially selling-off substantially. I would not be surprised by a 5% slump, but it could get to 10%!

Negotiations would continue into January and some can-kicking-down-the-road agreement would result. The negative effects of this market madness would affect stocks for some time as economists speculate what happens to the real US economy.

This US Congress stupidity would partially derail the improving recovery in the States.

Positive signs

Over the weekend we saw some more good US economic data. November industrial production came in above expectations – 1.1% higher – which represents a two-year high, primarily due to a production rebound in the wake of Hurricane Sandy as factories reopened and capacity utilisation also rose by more than expected. Meanwhile, US consumer prices fell by more than expected as oil prices continued to decline. When oil is removed, the remainder of the consumer basket (+0.1%) was up marginally.

So the doomsday merchants who tipped inflation would get out of hand in the USA were wrong again. And those who tipped a hard landing for China were also wrong with the HSBC flash PMI for Chinese manufacturing coming in at 14-month high!

We are poised for another good year on the stock market if the Yanks can get their act together on these fiscal cliff negotiations.

Mark my words, if there is nothing positive and snail-like procrastination continues the market will try and kick then Congress bums into action.

Deal or no deal

By the way, the confidence that the US will avoid the cliff is falling. CNBC did a survey which showed 46% of economists and market players think the USA will avoid the fall over the cliff, but 41% think it will happen!

Some respected market watchers think the S&P 500, which is now around 1,413, could go below 1,200 if Congress sets the economy up to slide over the cliff, so this week is important.

Of course, the details of any deal will determine how high the stock market goes in 2013. There could be changes to capital gains tax and the dividend tax and both could affect the stock market, but when it comes to market direction, it simply gets down to deal or no deal.

Sure any deal will slow down America’s economic growth, but if the deal is positive for the economy, it should bring out US corporate investment, which has been held back for over three years.

For optimists who want a great year on the market for 2013, we don’t only need a deal by December 31; it would be great if it we also get a deal that excites US businesses and that will sow the seeds of a great harvest from the stock market.

Fear will be tested this week, but it will get out of control next week if no deal is done!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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