Fiscal Cliff: Will Stocks Rise or Get Rocked?
http://finance.yahoo.com/blogs/the-exchange/fiscal-cliff-stocks-rise-rocked-213221114.html
The Senate has reached an agreement -- not necessarily a popular one among legislators, but an agreement nonetheless -- to avoid the tax hikes and spending reductions known as the fiscal cliff. Now it's up to the Republican-led House of Representatives to do the same or decline to sign off unless changes are made, and for the time being it looks like it's the latter.
For investors, though the question remains open as to what that means for stock markets in the U.S. and abroad, being left in this limbo may be the worst possible outcome. If no pact is set by the open of New York trading Wednesday, traders could opt to deliver Washington a loud and clear message about what they think of the intransigence. That means punishing stocks and sending the major averages lower, perhaps significantly so.
Generally speaking, any deal should be a good deal for the market since it eliminates an immediate worry. Getting something done probably beats getting nothing done, for now. Of course, also generally speaking, the fiscal cliff will prove to be only one point on the continuum of uncertainty, and soon it will be replaced by something else. The top candidate for inducing angst in the markets next is whether to raise the debt ceiling, around which the upcoming debate undoubtedly will be contentious. As a reminder, the 2011 dispute over the ceiling was one of the factors in Standard & Poor's decision to downgrade the U.S. credit rating from AAA.
Unfortunately, knowing precisely what will happen once traders get back to work this week is impossible, because try as we might, we still can't predict the future. However, owing to the extensive, months-long build-up to the fiscal cliff, a few possibilities can be considered. Should you want to plan accordingly as to what suits your own gut or level of risk, for tomorrow we may see:
That selling prevails from the outset. If there's no deal from Capitol Hill and President Obama, stocks may be in for an ugly day. Even if a settlement is completed, equity markets still could open down based on the idea of selling the news. One of the many adages about Wall Street is the concept of "buy the rumor, sell the news." Stocks were up big on Monday helped by anticipation of an agreement -- the Dow Jones Industrial Average ( ^DJI) climbed 166 points, or 1.3%, the Nasdaq ( ^IXIC) rose 59 points, or 2%, and the S&P 500 ( ^GSPC) was up 24 points, or 1.7%, to end a fourth straight positive year on a high note. An immediate rally in U.S. stocks that carries through the day on the thinking that even if Congress isn't there yet, it will be eventually. Other factors may also be in play, as will be addressed below. Just remember that as soon as the cliff is out of the way, the markets will be worried about something else. Again, the debt ceiling is a strong contender to fill this role. Stocks start with an advance, but that fades and the major markets are negative by day's end. Professional traders and trading programs aren't necessarily going to let any early profits run all session. They get spooked, they get out. They don't operate the way the home investors do, any more than the New York Yankees operate like your Saturday afternoon softball team. Never, ever forget that. Buy and sell points are often driven by technical indicators, not something as clear as did we get a fiscal cliff deal or didn't we. Selling of stocks that starts early and reverses as programmed buy levels are hit and pros see prices they like. The day ends higher. Reached while the House GOP was still considering its next move, Danny Riley, a Chicago-based futures trader and president of MrTopStep.com, noted that from his view, the market has a positive that might surface here. Traders initiated a number of short positions last Friday, and much of the buying on New Year's Eve was short-covering to close those positions, he says.
"We think it’s safe to assume that not all the shorts have covered yet," he says in an email, adding that he believes the first few days of the year will be positive, aided by low trading volume. As traders move to close out shorts, that demand can have the effect of driving up stock prices. Even so, "we do not think we will see a repeat of last year when the markets went straight up in the first quarter."
Riley's of the mind that traders won't sit back too long if the market should tumble initially. He's watching 1433, 1450 and then 1485 as key technical levels in the S&P futures, that is, areas where traders will battle over whether to keep bidding up stocks or decide to start selling. The S&P index closed 2012 at 1426.19.
"Can they sell the news tomorrow?" he says. "Sure, but the buyers will be out in force."
Now, if you're average Joe or Jane investor planning for retirement or the long term, your big picture hasn't been repainted substantially either way. You still want to see whatever assets you own, whether they be stocks, bonds, commodities or anything else, improve your financial situation over time. You may indeed see changes in various tax rates that do affect aspects of how you invest, but it's unlikely that, whatever happens with the fiscal cliff, your financial adviser will tell you to buy with both hands or to sell everything and head for the hills.
Don't panic, in other words, is what you'll hear, because you're thinking years into the future. Panic is for people with giant amounts of capital who have to do something now. The somewhat good news is history has shown us that investors do learn to adapt to the circumstances they're given, even when they're unfavorable. The ultimate take-your-ball-and-go-home alternative of hoarding cash under the mattress hasn't ever proven popular on a massive scale. The near term, though, can be stomach-churning as new rules are ingested and become familiar.
For tomorrow: To get a sense of what might happen in the U.S. markets, you can tune in a few hours early and look at major markets in Asia and Europe. Check around 9 p.m. or 10 p.m. ET (Tokyo is closed) to see the direction of the Kospi ( ^KS11) in South Korea and the Hang Seng ( ^HSI) in Hong Kong. Overnight and pre-dawn ET, get the data on the FTSE 100 ( ^FTSE) in London, the DAX ( ^GDAXI) in Frankfurt and the CAC 40 ( ^FCHI) in Paris. Markets are interconnected, and while they don't always move in lockstep, we might be able to get some clues as to how the fiscal cliff progress, or lack thereof, is being treated in the overseas averages.
Beyond the immediate trading impact, the longer lawmakers go without finalizing a fiscal cliff package, the worse it could get for the nation's finances. Should the full cliff be realized, many market and economic observers expect gross domestic product to suffer mightily, and a number have predicted a recession is all but certain. |
