U.S. Presidential elections are usually good for the economy. The latest one spent something like $6 billion with a lot of that going to ad spending. Besides the money it receives, the media loves these elections for other reasons. Every day there is something fresh and newsworthy. Candidate A is somewhere spewing strings of highly-quotable aphorisms while candidate B is doing the same thing in another part of the country. In addition, we find daily commentary from the “experts” trying to put some kind of spin on all these pronouncements, interpret what was said, or predict what might happen. All in all, it has been a fantastic feeding frenzy for the fifth estate.
Alas and alack, the election is over. And regardless if your guy won or not, one could make the case the biggest loser is the media! Those who toil in this industry must now return to the more mundane matters of train wrecks, celebrity splits and the normal who, what, where and why. Granted, Super Storm Sandy provided some sizable grist for the media mill, but that too has lost some momentum as of late. The recent hostility in the Middle East provided some high drama worthy of the nightly news, but that too has faded into the past.
Luckily for the media, there is one item that seems qualified to fill the massive void left by the election – the FISCAL CLIFF. It is obvious that this is the BIG STORY that seems to run on every media outlet EVERY SINGLE DAY. Even the stock market seems to be trading on the few wisps of commentary drifting out of the backrooms of Washington. Is today’s discussion more “constructive?” The market trades higher. “No visible progress?” Sell those stocks!
As everyone must surely know at this point the “fiscal cliff” is the negative economic impact expected if Congress fails to address the changes in tax rates, automatic government spending cuts and so forth. I offered my two bits on this issue back in May (you can see that posting here – http://www.thewolfgroup.com/blog/?paged=2), and I generally have not altered my opinion much on this matter. I still think “kick it down the road” is the mostly likely and most politically expedient outcome here.
Not everyone agrees with me on this (no shocker there…), and many are trying to quantify how BAD IT WILL BE (the implication being that it will be bad). There are an infinite number of possible scenarios here and many if not most of them seem pretty negative. But, if one steps back and considers what this really is, the worry and concern now rampant (at least in the media’s eye) may fade a bit.
First of all, this is a man-made phenomenon. The government’s difficulty in addressing spending, the tax code and entitlements has put us here. The last “kick it down” the road legislation included these “automatic” measures as an incentive for the two sides to sit down and hammer out a workable compromise. If they still can’t do this, what is stopping them from crafting another bit of legislation that moves these deadlines out a year? The business cycle generally moves along without much attention to little things like this. I suspect that the underlying business trends are likely to trump the fiscal cliff in the end.
Second, much of the negative economic impact may have already happened. We have seem many companies reporting soft demand in capital spending, tech and other places suggesting that business decision makers have been cautious in front of this cliff. One could argue that any resolution could quickly release a great of pent-up demand in business spending. It is interesting to note that the U.S. consumer has been spending quite well despite the fiscal cliff hubbub.
Third, maybe the market would actually celebrate much of the fiscal cliff’s purported negatives. Any additional negative economic impact would likely be short-lived (one quarter maybe?), and would be followed by stronger economic activity. The market would probably like intelligent entitlement reform, but might enjoy even “stupid” across-the-board government spending cuts. Above all else, the market hates uncertainty. Even an apparent “negative” outcome, if it erases much of the uncertainty we currently face, might prove to be a positive for the stock market.
Finally, if the guys in Washington actually create some sort of elegant, workable and brilliant compromise to the fiscal cliff issue, how could this not be a huge positive for the market? This may not be the odds-on bet, but it probably warrants non-zero probability status.
As always, I don’t make predictions, but I am comfortable being fully invested at this time. I think any weakness over the next few weeks is likely to be temporary, and probably would represent a buying opportunity for anyone holding cash.