Concern about the fiscal cliff has sharpened in recent weeks -- perhaps as other issues have receded a bit. Since whatever we should be worried about gets driven to page one, there is a constant emphasis on current issues.
Anyone who wants to look smart in print or on TV had better know how to repeat the front page. Our mission is to improve on your MSM sources.
In multiple prior articles in my Weighing the Week Ahead series, I have noted the lack of progress on all of the issues related to the fiscal cliff. Yesterday, I invited readers to consider the concept in the context of the election, looking to the highly partisan speeches at the conventions.
What is needed is compromise. Sadly, that is not on the agenda for either party. The conclusion is quite clear. We should not expect any progress on the fiscal cliff issue before the election.
Consequences of Inaction
Concern about the fiscal cliff has become the #1 issue for market strategists and economists surveyed by CNBC. Here is an interesting question from the most recent survey (which is worth a closer look):
(click to enlarge)
As you can see, the fiscal cliff is the biggest concern, by far. There are other reports that Europeans are more concerned about this than they are about the eurozone issues!
Another question in the survey asks about the current impact of the fiscal cliff. Survey says: 74% say that concern over the fiscal cliff is already having an effect on the economy. This concept is supported by reports from surveys from Manpower Group. We always like confirmation from multiple sources.
Summary of the Current Situation
Concern about political bungling related to the resolution of impending issues is a major factor in the minds of asset managers. There is intense skepticism with the following consequences:
Recession estimates -- 26% in the next 12 months according to CNBC. This reflects the chance that politicians do nothing.
Current economic forecasts -- seriously depressed by business indecision.
As investors review data on the economy, on recession chances, and on earnings forecasts, they need to understand the following: Everyone is building in concern about the fiscal cliff.
I try to focus on imminent concerns, while staying attentive to investors with differing time frames. Since I manage six different programs, I wear a different hat for each perspective. When wearing my trading hat, I do not expect any policy improvement before the election.
When wearing my investment hat, I see a different picture. I expect a resolution of these issues in the lame-duck session of Congress. The outcome will vary depending upon the election results, and I am not going to speculate very deeply right now. Something significant will get done. I am gaming the various scenarios and the differences are not that great for most names I follow.
Here is an example of the progress that I see. Most market observers are not watching signs like this, or they do not know how to interpret them.
The fiscal cliff problem is similar to other market worries. The severe negative consequences are well-known and therefore reflected in current stock and bond prices. It is a simple test of risk and reward.
It would be possible to write thirty pages on the fiscal cliff while hardly getting started. I expect to do more as the situation develops. My current conclusions are threefold:
Immediate concerns exaggerate the negative outcomes, mostly because traders and pundits are excessively negative about government, politicians, and political processes;
The worst case is well-known, and well-publicized;
There is no immediate upside catalyst.
Those who seek a great, long-term entry position in stocks have it right now (as I explained here). It is possible that prices will become even more attractive (e.g. move lower) if the economic concerns escalate.
I am pretty aggressive for new accounts right now, at current prices. I see many attractively-priced stocks, but it is a continuing story. We do not need to know the complete answer right now to find good investments. Those who wait for a complete resolution to the fiscal cliff will have higher prices, less risk, and less reward.
My advice is to ignore the MSM cacophony of fear about the fiscal cliff. We can re-evaluate after the election. Investors who agree with this concept will be on board with deep cyclical names like Caterpillar (CAT) and also tech stocks like Oracle (ORCL) and Intel (INTC)