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Is fiscal fear building?

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by Peter Switzer

Fiscal cliff fear is building but US investors are not spooked enough to dump stocks big time and volumes are low. Why so little fear?

There’s two weeks to go before the December 31 deadline hits but the market could be rattled if nothing positive develops this week — the week where most US politicians would prefer to go home for Christmas with a deal done.

For the record, the Dow dropped 35.71 points — hardly a big, negative reaction — or 0.27 per cent to finish at 13,135.01, while the S&P 500 gave up 5.87 points or 0.41 per cent to 1413.58.

If you need proof that fear is rising, the VIX or fear index is now at 17 after being around 16 last week, but these are still low readings. During the worst days of 2008, it got into the unbelievable 80s!

On Wall Street

Another sign of how little fear there has been, the Dow lost only 0.15 per cent last week. At home, we put on around 31 points last week to end at 4583.10 — we’re betting big time against the fiscal cliff!

The lack of negativity and market sliding is quite unusual given the fact that Apple has dropped 27 per cent in two weeks with the market having doubts over the company to sustain profitability with its new range of products and without Steve Jobs.

Some experts think the company has been so clever with its iPads, it could mean many people won’t buy laptops and desk computers.

Deal or no deal

On the cliff negotiations, nothing positive came out of last week’s reports of encounters between President Barack Obama and Republican House Speaker John Boehner. These two guys are the main players over the next two weeks and if the blame game eventually happens, one of these guys, or both, could be held responsible if the US economy slides over the cliff in the new year.

By the way, recession won’t immediately follow a no deal, and it could even be averted with action in 2013, but the stock market would sell-off big time if these two negotiators fail.

Data watch

Interestingly, the consumer price index actually fell 0.3 per cent in November, which is another kick in the pants for the negative types who have predicted market crashes and rampant inflation.

And this happened while industrial production rose by 1.1 per cent, which was the best gain in two years!

There was also the best HSBC flash PMI report on Chinese manufacturing in 14 months, which is another kick in the pants for the doom and gloom merchants out there who tipped a hard landing for China.

The Yanks have a big week of economic data from readings on the improving housing sector to manufacturing data to GDP as well as consumer sentiment and leading indicators.

Eye on the RBA

At home, the focus will be on the Reserve Bank (RBA) with the latest minutes from the Bank’s board meeting where the cash rate was cut by 25 basis points to three per cent.

The RBA’s view on rates will be looked at in terms of the Gillard Government’s pressure to give up on its budget surplus promise as the economy slows and Labor MPs fight against more spending cuts in an election year.

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, December 17, 2012

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