A smart analyst recently stated that economic performance is not the real determinant of stock prices. Profits and the expectations of earnings growth are what really matter. In the market of 1995 or even 2005 one may have agreed, but to pretend there is not a “monolith” of debt casting a long shadow over the economy and stock market is somewhat juvenile.
The whispers out of Washington indicate the wheels are moving and at least Governor Romney’s team has leaked that they will try to avoid a harsh fiscal cliff prior to January if he is elected. However, here comes the deja vu: The fiscal compact/cliff between the Republicans and Democrats was put in place due to the US Treasury Debt Ceiling and the fact that neither side could get around the expanded power base of the fiscal conservatives newly elected to Congress in 2010.
The US debt ceiling is now set at $16.394 trillion. Anyone interested can look up the numbers on the US Treasury’s website, but in round numbers we have about $16.2 trillion in debt that qualifies for the ceiling and are issuing about $90 billion in net new qualified debt per month.
We are clearly going to have another debt ceiling fight at the same time the Congress is going to, supposedly, revoke their solution to the last debt ceiling fight. This is ironic, but one could use many other words, as the outcome of the coming Congressional and Presidential elections will surely shape policy, our economic growth trajectory and thereby corporate earnings and stock prices.
The outcome of this election is not yet clear. My belief is that a Romney win will keep the market up in the short-term, but unless the Congress gets policy correct 2013 may be in question. An Obama win with a Republican congress–that is, the status quo–looks likely and such a scenario may trigger a heavy sell off as investors try to avoid the increase in capital gains and dividend tax rates.
The President and Mr. Romney shared a number of laughs at a recent dinner at the Waldorf in New York. Just shows how much different our system is versus many of the more unfortunate countries. Let’s hope this is a sign that behind closed doors there is a plan to spare the golden goose. The fact that such discussions are clearly happening behind closed doors when they should be discussed in public debates is another issue.
The investments discussed are held in client accounts as of September 30. 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
