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Fiscal fear prevails

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by Peter Switzer

The best news for Wall Street in a week when the Nasdaq was down 4.17 per cent, the Dow Jones Index was off 3.88 per cent and the S&P 500 was some 3.7 per cent underwater, was that when the Republican boss in the Congress, John Boehner said, “I believe we can do this”, the stock market spiked up.

That’s why I have been arguing that the fiscal cliff negotiations will take the market down and a good solution will take it up.

And while any solution will be a positive, when it comes to a sustained solid rally, it would be best that President Barack Obama and the Congress come up with a market-ticking solution.

The Nasdaq logged its sixth consecutive week of losses, its longest streak in over three years. And the Dow posted its fourth straight losing week, the longest since last August.

It’s interesting how this has played out with the Nasdaq down six weeks in a row and close to correction territory — down 10 per cent — but the VIX, which measures market fear, is still only at 16.42. Fear is being contained for the moment and this is based on reasonable investors believing reasonable politicians won’t allow the US economy to go over the fiscal cliff, generating a recession.

In the news

Making market matters worse are a range of challenges including:

Israel and Palestine exchanging rockets
Syria and its effects on Turkey
The oil price is rising because of the above issues
US economic data will be affected by Hurricane Sandy
Stocks are down around five per cent since election day
Some investors are taking capital gains before a possible new tax regime on shares comes in if Obama gets his way
The AAII sentiment survey shows bearish sentiment is at 48.8 per cent — this is the worst reading since August 2011 when the market really spat the dummy

The week ahead

As you can see, there are plenty of reasons to be negative and it will be Congress negotiations that will have the biggest effect on stocks.

Ahead this week there will be important housing data, a speech by Fed Chairman Ben Bernanke, PMI manufacturing index data, consumer sentiment and leading indicators before Thursday’s Thanksgiving celebrations.

Locally, the minutes of the latest RBA meeting will be big news for those searching for another rate cut in December.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, November 19, 2012

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