Now that the election is over, the markets decided to extricate themselves from the tunnel vision about who will run the government, and widen their sights to see what threats our money faces next. Well, it didn’t take too long to figure out that the number one issue facing the markets is the “fiscal cliff.” This risk is what I have been calling a toxic cocktail of federal budget cuts to critical areas such as defense, combined with the end of the Bush-era tax cuts. This double-pronged threat to the country’s GDP could be huge. If the president and Congress fail to reach an agreement by the end of the year, a recession is the most likely outcome.
As of this writing, the president had yet to meet with Congressional leaders on this issue, although he has met with labor and “progressive” leaders about what they think should be done. Today, the president is making an appearance to business leaders to hear some of their views on a solution. I think most of this communication is lip service. But in the interest of political preservation, I suspect we could get some kind of deal that at least staves off most of the defense cuts and most of the tax cuts. I do think, however, that those making more than $250,000 a year can expect to pay higher taxes starting January 1, 2013.
The consequences of a failed fiscal cliff deal, and the possibility that there will be more pain spread to businesses as a result, has sent traders running for the exits ever since the president was reelected.
The chart below of the S&P 500 Index clearly shows a drop during the past week that has taken the broad measure of the domestic equity market below key technical support at the 200-day moving average (red line).
To make matters worse, market leaders such as Apple (APPL) really have been sold off here, with Apple now in bear market territory, having crumbled more than 20% from its most recent high.
Other negatives hitting this market now are the renewed protests against fiscal austerity measures in Europe. Today, we saw many people take to the streets throughout several European countries, all in an attempt to make it clear that they don’t want to sacrifice government benefits for a European Central Bank-funded bailout. The protests caused some big selling in European equity markets, and that selling has translated into more downside in the U.S. markets midway through Wednesday’s trading session.
To be certain, there are a lot of headwinds in the market right now, with the fiscal cliff and European social unrest being the two most immediate issues. Past these, we have fears about a global economic slowdown, slower corporate profits, and more uncertainty over Europe’s ultimate bailout resolution.
Until these issues are at least partially on the backburner, look for a buyers’ strike in equities — and that means a choppy, plodding market until headlines dictate otherwise.
Uncertainty — The Ultimate Enemy, Not a ‘Scam’
Ask any real-world business person tasked with the responsibility of delivering profits to shareholders, and/or meeting a payroll, what the biggest obstacle is to growing his or her business and hiring more workers, and the overwhelming response will be “uncertainty.” But don’t just take my word for it. Rather, let’s see what some of the leading business groups have to say about this issue.
In a recent Foxbusiness.com article titled, “Why is Uncertainty So Unbelievable to Paul Krugman?” reporter Elizabeth MacDonald culled several quotes from a number of business surveys and commerce-oriented organizations that actually go straight to the source and asked executives about the challenges they face.
According to the U.S. Chamber of Commerce, a recent survey conducted by Harris Interactive of 1,391 small-business executives found that, “Uncertainty is at its highest level since last year.” That same survey also found that 83% of small businesses leaders indicated they are not hiring due to uncertainty. Thomas J. Donohue, president and chief executive of the U.S. Chamber of Commerce, offered the following quote that I think sums up the survey’s findings, “Continued uncertainty is the greatest threat to small businesses and our country’s economic recovery.”
So, if business leaders throughout the country say that uncertainty is basically their biggest enemy right now, then leave it to an academic to tell them they are misguided.
This is essentially what Paul Krugman, a New York Times columnist, Princeton Economics professor and Nobel Prize winner, wrote in a recent blog post aptly titled “The ‘Uncertainty’ Scam.” Now, as he typically does, Krugman politicizes this issue by making it all about President Obama, and how it’s basically not the president’s fault that business executives are feeling angst about the future.
To support his case, Krugman cites a policy paper written by Stanford University’s Nicholas Bloom, Scott Baker and Steven Davis that attempts to find a connection between uncertainty and job growth. Krugman also cites an analysis by Jan Hatzius of Goldman Sachs that claims uncertainty is essentially a reflection of a weak economy. Here Krugman notes a spike in uncertainty found in the Hatzius analysis in mid-2011, right when the confrontation about the debt ceiling took place. Now, here is where Krugman’s faulty logic kicks into gear.
In his blog post, Krugman writes, “So think about it: even if you accept the Bloom et al. paper as gospel (which you shouldn’t), what it’s really saying is that the U.S. economy is being held back by Republican extremism, by the GOP’s unprecedented willingness to hold the full faith and credit of America hostage for political gain. It is not, repeat not, about Obama looking at rich people funny.”
Ah, leave it to an academic to see politics where business people see real-world obstacles.
The issue here, Professor Krugman, is not whether business people blame President Obama or the Congress, or both, for the uncertainty affecting their decision making. The issue is that politicians in Washington, and their ability to create chaos for business people with their incessant meddling in the economy, is what is causing the economy to stall out, and businesses to refrain from hiring.
For investors, the uncertainty about the election, the looming “fiscal cliff” and the effect of new regulations brought on by Obamacare are the things we all are trying to adjust to when committing our dollars to various companies and sectors. Until we get clarity on these things, the markets are liable to be bogged down in uncertainty, too.
Now, if only the politicians, and Professor Krugman, can realize this reality, the business community and investors around the globe would be able to let out one giant sigh of certainty-based relief.
Follow Jim on Twitter: @Woodsish.
More Jeffersonian Wisdom
“I never consider a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend.”
Last week, we had featured a great quote from the equally great Thomas Jefferson with his thoughts on how democracy will cease. This week, I offer you a more conciliatory chunk of Jeffersonian wisdom, which is particularly applicable now that so much of the country is split in terms of political leanings.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.
To the best within us,