We hope you are enjoying the holiday season!
Unfortunately, the fiscal cliff is turning into the last minute drama that we all anticipated. The American public has voiced its displeasure with the political games being played, which now seems to be a behavior that is becoming commonplace in our political process. The end result of all this drama (theater actually) will likely be either 1) a last minute “mini” bill or 2) a promise to pass a more substantial bill in January. Regardless of the outcome, it seems to me that our political leaders are either oblivious to the negative ramifications their political posturing has on the economy or they are simply more concerned with their own political agenda. Continue reading
It looks like Washington is regressing further into their partisan ways. We are still convinced, despite all their “efforts”, that a bill will be passed to avoid the fiscal cliff. However, the real question is whether they will get the deal done before year-end, or whether the circus will continue until the tax rates go up for everyone in early January, at which point they immediately pass a bill that would in effect “lower taxes” thereafter. I think the market will settle into the latter scenario as the worst case, and we will avoid any large scale sell off as they finish their partisan political games. Continue reading
As gridlock in Washington remains at the forefront in investors’ minds, there basically is nothing new to report on the fiscal cliff that is reliable after another week of posturing between the two parties.
Although the media is consumed with the fiscal cliff, there has been some good news on the economy lately. Vehicle sales, ISM non-manufacturing, unit labor costs, November jobs and housing activity have shown improvement. The Consumer Price Index (CPI), the key measure of inflation, fell 0.3% in November primarily due to the 7.3% decline in the price of a gallon of gasoline. Overall, core prices are still up 1.8% compared to a year ago. (A reading of 2% in core inflation is considered within the Federal Reserve’s comfort zone). The relief at the pump may translate to more disposable income for holiday shopping. Strong consumer spending this holiday season could offset some of the weakness in other areas such as corporate investment. Continue reading
The November jobs report was released this morning and showed that employment climbed by 146,000, following a revised 138,000 increase in October. The unemployment rate dropped to 7.7% as Superstorm Sandy’s impact on the labor market appears to be less than anticipated. The drop in the unemployment rate is somewhat misleading as the labor force “participation rate” declined from 63.8% to 63.6% (over 350,000 people left the workforce). Although the employment picture is only modestly improving, it does bode well for the economy heading into 2013 and proves that there is decent momentum in the economy now. Once Washington settles the “fiscal cliff” negotiations, the unemployment picture will once again be a major focus for the markets heading into 2013. Continue reading
The market seems to be in a holding pattern as investors wait for more news on the “fiscal cliff” negotiations. After reading President Obama’s first offer, it appears to me that we are back in the Congressional “used car” style of negotiations in Washington. I have been commenting that we may see him move more towards the middle in an effort to put all of his political capital into improving the economy to save his legacy as President.
Over the next three weeks it is very likely they will indeed come to an agreement. Unfortunately, we will have to deal with all the grandstanding commentaries from each side while we wait for an agreement, arguing why the other side is the big problem. In the meantime, economic news continues to support stocks. Jobless claims fell again in November, home sales continue to improve and bank loans are rising. Consumer spending fell in November due to the impact of super storm Sandy but will likely snap back with the rebuilding efforts and Holiday sales are expected to be strong.
We are also concerned that the uncertainty in Washington may be reflected in fourth quarter earnings, which may show a slight drop off in for the quarter due to business spending that was put on hold. We will look to take advantage of any market pullback because growth is likely to accelerate in the first part of 2013 with the rebuilding after Sandy and pent up demand for corporate spending on technology and capital goods. Mergers & Acquisitions are also likely to pick up in 2013 if confidence improves after the fiscal cliff legislation is passed.