What in the hell is going on? And what happened to our buying opportunity? That was my Saturday morning reaction to discovering that Wall Street had had another good day at the office, but it surprised me as Congress to date has not got down and dirty on the thorny subject of the fiscal cliff.
Sure we have seen some positive sentiment expressed by the Republican speaker John Boehner that made me feel that we’d see an eventual agreement, but I expected some arm-wrestling that would send stock prices down until a settlement looked likely. But it looks like smart market players are taking their lead from what Winston Churchill once said of the Yanks:
“You can always count on Americans to do the right thing, after they’ve tried everything else,” the great British Prime Minister observed.
So, it’s possible I have underestimated the good sense of our American buddies, but I’m still a little worried that this could be a sucker’s rally, though I do have the gut feeling that it could be fair dinkum.
The game plan
You might recall that my game plan was always to be a dip-buyer when the fiscal cliff sent stock prices down, but it could be that there are a lot more buyers of the dips out there now as interest rates fall and dividend stocks still make appeal.
This has been our recommended strategy at the Switzer Super Report for the past year and it has been my argument on my www.switzer.com.au [1] website and my TV show on the Sky Business channel.
So, have we dodged the fiscal cliff drop into a US recession and a stock market slump? Well, let’s just summarize the remaining issues and then guess what happens between now and just before Christmas, when I reckon US politicians will want to have this sorted.
These are the important issues:
- The US debt is around US$16 trillion and growing.
- A real deal to reduce the deficit and debt is the goal before December 31 or else automatic spending cuts and tax increases kick in.
- These automatic measures would in all likelihood cause a recession.
- An alternative agreement could be put in place temporarily, which the market would not like, but it would prefer something other than a drop over the cliff.
- Both Obama and the Republicans in Congress have plans to reduce the debt, but the Obama’s hits the wealthy and this could be a flashpoint.
- Whatever shows will be a 10-year plan and the calibre of the decisions will be mulled over by market experts and the stock price reaction will be limited by the quality of the blueprint created.
- The big battle will be on raising the top tax rate from 35% to 39.6% for those individuals earning $200,000 or a family on $250,000. This is Obama’s stance and the Republicans don’t want it, preferring to reduce some deductions and tax credits.
- To play around with deductions and credits could hit lower and middle income Americans and that’s where Obama and Boehner are bound to arc up.
- On the spending side, Medicare and social security will be important battlefields and are bound to breed market reaction.
- I could go on, but as you can see there is a lot to sort out over the next three to four weeks and so it could easily spill over onto stocks.
[2]My outlook
To understand the difficulty of the task, look what an Associated Press article pointed out over the weekend: “Because spending for entitlements occurs automatically, (it) accounts for nearly two-thirds of Federal spending and is the fastest growing part of the budget.”
So the fiscal cliff battle gets down to higher taxes on the wealthy and what can be taken off lower and middle-income Americans without breeding a four-year hate that will come back to haunt them in 2016, when next the Yanks go to the polls.
I think stocks will slide again before Christmas and there will be a buying opportunity, but if the disagreements in Congress are managed without serious acrimony, it might only be another shallow dip like the one we saw from early November.
I don’t want to think about serious acrimony, the fiscal cliff happening and stock prices crashing.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Paul Rickard: Beware the bond market trap [3]
- Rudi Filapek-Vandyck: The broker wrap: eight stock buys [4]
- Lance Lai: Gold preparing to break above the US$2,000 level [5]
- Tony Negline: Preparing for your retirement – Part 1 [6]