Political theater was the main theme of the fourth quarter of 2012. The election was the first act, with the fiscal cliff issue being the second. It now seems likely that fiscal cliff issues will not get solved before the end of the year. The banter going on between the political parties is not helping confidence, either.
With this development and with some investors running for the exits, there appears to be little clear thinking in anything outside of the fiscal cliff issue. By most accounts and based on recent economic releases, the economy has been improving, albeit at a modest pace. Overall valuation of the market is at a reasonable level and the Fed has committed to doing the most it can do. Companies are managing their financial affairs quite well. In other areas, European economic issues have largely disappeared from the news and China growth is looking more promising.
As hopeless as Europe has been seen over the past year, we are not near their troubled situation. Nevertheless, the fiscal cliff is a serious issue and the politics are difficult. It is a scenario that does not have an investable format. One side can make a case for getting out of the way, assuming no agreement is reached. Another side can make a case that economic fundamentals are supportive of investing and will win out in the end. Still another case says an agreement will eventually be reached, but when is not known. I stand with a combination of the last two cases. I think it is likely that a deal will happen, but it will take longer than hoped. This may create a discouraging and difficult time period for investors to anticipate.
There is also possibility of a deal quickly emerging from closed door discussions. Because I feel a deal will likely happen and fundamentals are favorable, I believe investment allocations should be maintained. This also includes my belief that when and if a deal takes place, it will probably be too late to invest in the move. We’re not seeing a great deal of adverse conviction by investors, despite the uncertainty.
As alluded to earlier, markets myopically focused on a single issue usually lose sight of other factors. I think we are in one of those situations, and hopefully this post gives some perspective and weight to all of the important items affecting the markets.
Let me close with sincere thanks for everything and best wishes for happiness in your holiday celebrations.
