Look at the chart below, what do you see?
S&P 500 PE10 data by YCharts
The above chart has the S&P 500 index over the index PE 10 ratio. Up to 2008, the PE of the index has held steady at around 25-27 while the S&P index was rising. In other words, the fundamentals were getting better and prices were rising, thus the PE remained the same.
Now at around the end of 2011, something changed. The index after the end of the recession continued to rise, but the market was getting cheaper. If earnings continue growing (even a little) and the S&P Index goes nowhere, the market will simply keep getting cheaper.
US Industrial Production Index data by YCharts
In the above chart, industrial production, durable goods and capacity utilization all look good. Yes, one can always find reasons to be bearish and see the glass half empty, but the facts are that things are not terrible and in no way do these indicators forecast a major catastrophe ahead.
S&P/Experian Consumer Credit Default Composite Index data by YCharts
The average consumer is also defaulting on credit below the long term average of 2.5%. This is good, not bad.
US Average Weekly Earnings data by YCharts
And weekly earnings, nominally at least, are not falling but are still in a long term uptrend
XOM PE Ratio TTM data by YCharts
All of the stocks above represent some of the biggest names in the U.S. stock market. All of the above stocks are either reasonably valued or cheap. And any way one looks at them, they are cheaper than they were years ago.
MSFT PE Ratio TTM data by YCharts
The same thing can be said for some of the biggest high-tech stocks also. They are either reasonably valued, cheap or very cheap.
And all the stocks listed above have a reasonable PE today and all have a lower forward PE. If analysts have done their homework correctly, then this time next year, assuming prices don't rise at all, the following stocks will have a PE of:
Microsoft (MSFT) 8, Oracle Corporation (ORCL) 11, Dell Inc. (DELL) 6, Hewlett-Packard Company (HPQ) 4, General Electric Company (GE) 12, Exxon Mobil (XOM) 10, Procter & Gamble (PG) 16, General Motors Company (GM) 6.7 and Wells Fargo & Company (WFC) 9.
What this means is that, even in the event that the politicians don't find a way to compromise on what has to be done with the fiscal cliff, the market is prepared for them.
While a 4% fiscal adjustment will indeed lower U.S. growth and the economy will fall into recession, nevertheless, stock prices will not fall by much, if at all.
The reason is that stocks are simply too reasonably valued or cheap to fall. I forecast that even in the worst case scenario, all leading U.S. stock indicators will not fall by much, instead simply going nowhere and will wait for the fundamentals to catch up.
In order for stocks to fall by much from here, something really bad has to happen on a global scale. And from the charts above, I simply don't see that happening, even if Europe manages to mess things up even more than they already are.
Stocks my not go up, bet they will also not go down, even if the fiscal cliff kicks in.