So the non stop Fiscal Cliff paranoia continues unabated. Apparently, it is the ONLY THING that matters to the markets. Every twist and turn in the negotiations is crucial to the future of the Republic.
I don’t buy it. First off, as David Kotok explained, the fiscal cliff is more of a slippery slope than an actual abrupt cliff. And second, I detest single variable analysis when it comes to market action.
As we discussed last night, it behooves investors to consider what else is driving equity markets. I can think of at least five factors:
1) Earnings are the weakest in 3 years
2) Portfolios have been poorly positioned for higher Capital Gains and Dividend taxes
3) Europe crisis unresolved, and getting worse
4) The 17% rally in first 3 quarters had markets ahead of themselves
5) The decreasing impact of Federal Reserve QE.
The fiscal cliff amounts to about $600 billion in friction spread out over the course of 12 months. Fair estimates are that it will cost about 0.50% off of GDP, now estimated to be about 2.0% for the calendar year 2013.
I submit that these other factors weigh at least as much, if not more, in the markets current action.
Single vs. Multiple Variable Analysis in Market Forecasts (May 4th, 2005)
Fiscal Cliff or Slippery Slope? (November 19, 2012)