Fiscal Cliff Diving

The risk of the Fiscal Cliff increased last week and that acted to reduce business confidence as well provide for a general sense of “ugh”.  In addition, there are some concerns over the President’s economic agenda since a lot of his work seems to be focused on areas other than jobs.  With recent uprisings in the Middle East, the Fiscal Cliff, and Sandy, there’s little blame there, but his eye is off the ball as it relates to jobs right now.  That’s a drag – economically and otherwise.

Here’s how the markets did last week.

Mano a Mano

Speaker Boehner said he is willing to consider new revenues within the framework of tax reform but he is very much opposed to hiking tax rates on anyone.

President Obama reiterated that he wants taxes raised on individuals earning more than $200,000 and couples earning more than $250,000.  He went on to say that he is “open to new ideas,” but then added it would be “very difficult” to raise the revenues he would like to see by just closing loopholes.

The Wall Street Journal reported that President Obama is seeking a $1.6 trillion tax increase over 10 years.  This is almost double what was reportedly negotiated in fall of 2011, which failed.  So the market and business took a dark view of President Obama’s tone, and saw it as combative causing shares to sell off midweek. The Friday meeting between President Obama and other major players, however, provided more hope and less rhetoric, as comments coming out of the meeting were more conciliatory.

So because of all this, the S&P 500 Index has lost ground in three of the last four weeks.  Investors look at summer and fall of 2011 as a playbook for how this could go and it’s making people jittery.  The good news is that a poor outcome to the cliff has been priced in, meaning I think that any progress will result in a rally. Friday’s bounce off the low for the day in the Dow to end up positive by about 100 points is an example of how just some talk can spark a rally.

Despite Erskine Bowles statement on Friday that there is only a 1 in 3 chance that there is agreement on a deal, I’m confident that everyone realizes it is in no one’s best interest to see the cliff happen (which is a 2 out of 3 chance).  This is why we are holding tight right now with our equity market exposure, but also keeping a very close eye on how things go.  The reality is that even though only takes a few moments to raise cash or hedge portfolios, you also have to know when to put it all back to work.  You have to be right twice.

Odds on the Roulette Wheel are better than making that guess correctly, so we are holding steady…for now.

Finally, thanks to Bespoke Investment Group, we provide a performance chart of the 10 sectors of the Standard & Poor’s 500 (S&P 500) since Election Day.  As you can see, Financials, Energy and Tech are the three hardest hit versus the overall index.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.