Business News

The cliff and 2% rates in Oz

| More

by Peter Switzer

Good news on the fiscal cliff and a solution before New Year could make the claims that our cash rate will fall to two per cent totally way out! But if the Yanks go over the cliff, it will be a hard day at the office for stocks in 2013.

The Dow finished up a 100.38 points or 0.76 per cent while the S&P 500 index — a much broader index of US companies — put on a big 1.19 per cent. So what gives with the fearsome fiscal cliff?

Clearly, some good news has brought out the buyers, so let’s hope it lasts.

And stocks managed to do this despite a poor manufacturing reading from the state of New York, but this number was negatively affected by Hurricane Sandy.

Cliff news

Believe it or not, there wasn’t any really conclusive positive news on that damn cliff, though President Barack Obama and Republican negotiator John Boehner did meet for 45 minutes. Also, there was talk that the Republicans are looking at accepting Americans with $1 million a year in income could lose their Bush tax cuts that came with the GFC recession. However, Obama wants the income threshold to be lower.

Today’s rise is in conflict with the opinion that US politicians could let the country go over the cliff but then save them from drowning with a deal struck in January! (CNBC)

And while this is possible, this would cause some big sell-offs and wild volatility for stocks. I really hope these guys are wrong.

I believe a second-rate deal for two years is better than a silly demand-crushing one that could make the deficit/debt fight look fair dinkum, but in reality if responsible policy hurts GDP growth in the short-term then confidence will be shot, meaning less production, income and less tax collected!

If the cliff can be fenced off, then the really big story — China’s better economic readings — will take centre stage for 2013.

At the moment we’re seeing higher iron ore prices and Rio as well as BHP’s share prices are heading in the right direction.

What to expect in 2013

If the cliff is beaten, I see a good economic and market year next year, and it will KO the need for the Reserve Bank to drop the cash rate to as low as two per cent.

With the cash rate now at three per cent, personally, I’d like to see one or two cuts next year to help the dollar slip a bit to help local business and exporters, but a two per cent target on the cash rate looks unnecessary, especially if the Treasurer gives up on his silly idea of a budget surplus this year with the mining boom wobbling at the moment.

Also, a two per cent cash rate would be shocking for retirees playing it safe, but it would force them to look at safe income stocks, which would help those shares with a good reputation for paying dividends.

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: Tuesday, December 18, 2012

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Why Aussie stocks lag Wall Street

Kill QE, kill rally? Nope!

Dow to reach 20,000 – can you believe it?

It’s not All Too Hard, it’s More Joyous!

Abbott deserves a Tony Award for that speech!