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For weeks now the market has been hung up on two big events. The election and the fiscal cliff. Those who were buying stock yesterday vastly miscalculated the importance of the election relative to the fiscal cliff. Yes, the election results reduced some uncertainty, but the fiscal cliff is a far more important issue. President Obama’s re-election is essentially a status quo result. That is, there are no big changes coming in terms of Fed policy or the President’s stance on fiscal policy. Romney obviously would have been dramatically different given his negative rhetoric around the Fed and balanced budget approach.

If you follow our macro work you understand the importance of the large budget deficit in this environment. Not only has it steered GDP growth, but its steered corporate profits as private investment has remained weak as a result of the credit bubble bursting and the lack of aggregate demand. So a $600B cut to the budget is enormously important for 2013. In a research note last night I summarized the keys here:

The primary market takeaway is that considerable uncertainty is likely to develop in the coming weeks as

this result will increase the odds of gridlock in Washington, and the fiscal cliff is unlikely to be resolved until December at the earliest….We remain strategic cyclical (longer-term) equity bulls, and short-term tactical cautious.

The market hates uncertainty. And that’s what the fiscal cliff creates. A resolution on this is increasingly important for understanding market directionality and economic directionality. Unfortunately, we won’t know the answer for several weeks and maybe even months.

Source: The Fiscal Cliff And Market Uncertainty