The S&P 500 rose 1% last week, dodging two doomsday warnings in one week. The Mayan calendar is zero-for-the-21st century, but the fiscal cliff still looms. It's beginning to look like the politicians in D.C. will "leap over the cliff" and then repair the damage later after seeing what needs to be fixed. Outside the Beltway, however, global markets are rising and U.S. GDP was revised up to 3.1% growth!
The Fiscal Cliff Is Tedious, But It Certainly Moves The Markets
At the risk of boring you with more details on the most tedious story of the year, the "financial cliff" continues to send the stock market on a roller coaster ride. Early last week, the market rallied on reports that President Obama and House Speaker John Boehner were making concessions. Then talks fell apart when Speaker Boehner proposed a "Plan B" for raising taxes on millionaires only. President Obama and some House Republicans rejected Plan B. Apparently, President Obama does not want to hazard any major entitlement reforms.
As Congress breaks for Christmas, it appears like a deal may happen on the brink of the New Year or in early January. If it's January, that means we'll take a trial leap off the cliff -- i.e., the Bush-era tax cuts will expire, payroll withholding taxes will rise, and taxes on dividend income will soar from 15% to as high as 43.4% (i.e., 39.6% + 3.8% for Obamacare). These high taxes on dividends worry investors the most.
Early last week, the stock market rallied on reports that dividend taxes might increase by only 8.8%, from 15% to 23.8% (i.e., 20% + 3.8% for Obamacare). However, that hope fell apart after President Obama's Wednesday press conference. Facing a near-tripling of taxes on dividends in 2013, the market fell late last week on fears of a sudden end to the era of high dividend yields, which have cushioned stocks in 2012.
If Washington elects to go off the fiscal cliff in January, I believe the President will fly back from Hawaii to convince Congress to issue retroactive tax cuts to "save the middle class" by restoring the Bush tax cuts for everyone except those earning over $200,000 (or $250,000 for married couples). This way, the President gets all the tax increases he is seeking, while the other elements of the fiscal cliff -- most notably defense cuts -- won't bother him all that much. We may have to go "over the cliff" to get politicians to act.
Stat Of The Week: U.S. GDP Revised Up To A 3.1% Growth Rate
Despite the hijinks in Washington, D.C., the economic news last week was largely positive. On Thursday, the Commerce Department announced that third quarter GDP was revised up to a 3.1% annual rate from a previous 2.7% estimate, due mostly to better trade data and more healthcare and infrastructure spending. This GDP report was a pleasant surprise, since economists had estimated a smaller revision to just 2.9%.
The other positive report released Thursday was that sales of existing homes rose 5.9% in November, the highest pace in three years, reaching an annual rate of 5.04 million units. Alas, that good news was offset by a 0.2% drop in the Leading Economic Indicators (LEI) in November, effectively lowering the LEI's six-month growth rate to zero. However, the Conference Board's coincident economic index rose 0.2% in November, basically meaning that conditions are okay now, but the future looks increasingly cloudy.
On Friday, we got two more pieces of good news. First, the Commerce Department announced that durable goods orders rose 0.7% in November, while October's orders were revised up to a 1.1% increase. Economists were expecting only a 0.1% rise in November. This surprising surge in orders was mostly due to capital goods orders (excluding volatile aircraft orders) rising 2.7% in November and 3.2% in October.
The other positive economic news on Friday was that the Commerce Department announced that personal income rose 0.6% in November -- the biggest monthly gain since February and much better than the economists' consensus estimate of a 0.4% rise. Even better, real disposable income rose 0.8%, the biggest increase since January 2011. ("Disposable income" is essential for a healthy holiday shopping season.)
With such essentially great news released on Thursday and Friday -- rising GDP, healthy durable goods orders, strong existing home sales, and a surge in personal income -- economists let the sagging Leading Indicators cause them to project much lower (1.5%) annual GDP growth in the fourth quarter. We'll see.
While Washington Waffles, Most Global Markets Keep Rising
As Rome burns - -err, I mean, as Washington, D.C. gets ready to fall into an unknown fiscal abyss -- many global stock markets are rallying. Combined, world equity markets are nearing a 17-month high. While the S&P 500 is up a healthy 13.7% through December 21, some global markets are up at twice that pace:
Top Euro-Zone Markets of 2012*
*In U.S. dollar terms. Source: The Economist, December 22, 2012
Last week, we learned that German business confidence rose for the second straight month. Even Greece had its credit rating upgraded last week. In fact, the troubled European debtors did best last week: Greek stocks rose 3.6%, Italy rose 3.0%, and Spain rose 2.6% in euro terms, but they rose 4.8%, 4.2%, and 3.8%, respectively, in U.S. dollar terms, according to Barron's (using Morgan Stanley data). As the euro gains power, U.S. investors enjoy a bonus, so perhaps we should thank our politicians for these windfall profits.
In the wake of the Fed's shocking announcement that it will extend Quantitative Easing into infinity and Operation Twist to eternity, the U.S. dollar keeps eroding, due to the fact that 0% interest rates, the "fiscal cliff," and our annual $1 trillion deficits "as far as the eye can see" do not form a firm foundation for a strong currency. That's why multi-national investing is making a comeback, thanks to a weak U.S. dollar.
We are currently between quarterly earnings announcements, with an uncertain outlook on corporate sales and earnings for this quarter and next quarter, but I remain optimistic that the current high dividend yields of the S&P 500 and the corporate bond offerings funding stock buybacks will keep a floor under stocks.
Despite Washington infighting, the combination of an improving economy, strong global markets, and a weak dollar are creating a launching pad for companies that post strong global sales and earnings in 2013.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.