Markets to Lose Patience over Fiscal Cliff this Week

Monday, 17 Dec 2012 08:57 AM

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Markets will lose patience with Washington’s inability to avoid the fiscal cliff in the coming days, so expect volatility to pick up if the White House and Congress fail to strike a deal, experts say.

At the end of this year, tax breaks are set to expire at the same time government spending cuts are scheduled to kick in, a one-two punch to the economy known as a fiscal cliff. The nonpartisan Congressional Budget Office (CBO) has warned that failure to avoid the fiscal cliff could push the United States into a recession next year, predicting the country’s gross domestic product to contract 0.5 percent as a result.

Sticking points have included Democratic proposals to hike taxes on the top 2 percent of earners, a measure finding opposition among Republicans.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

Markets have been reasonably patient up to now, understanding that ironing out a 2013 fiscal framework for next year needed to avoid the cliff will take time.

Time, experts say, is running out, so unless policymakers strike a deal soon, the markets could roil.

“You get to two weeks before the end of the year, and it’s go time,” said Gina Martin Adams, institutional equity strategist at Wells Fargo Securities, according to CNBC.

“Either they’re doing something now or not, and you’re going to see the market reflect that.”

Others agree that volatility may rear its ugly head out of the uncertainty.

The Standard & Poor’s 500 is currently trading around 1,413, but could really cool in the coming days, said Deutsche Bank Chief U.S. Equities Strategist David Bianco.

“Our base-case scenario is that if we don’t have something that’s going to the CBO to be scored by late next week, I think the market starts losing patience, and we go under 1,400,” on the S&P, Bianco told CNBC, adding that he doesn’t see the index sliding below 1,350 unless Washington keeps “botching this thing up.”

“If it goes into next year and a lot of taxes go into effect, then we watch to see if we go into recession, and if we do, then the S&P could fall to 1,200, even if it’s a mild one.”

At the end of December, investors often rebalance their portfolios to prepare for the next year’s trading, which often bumps up stock indices and often referred to as a Santa Claus rally.

Don’t expect Santa to pay a visit to equity exchanges if fiscal uncertainty drags on, other experts point out.

“A Santa rally is probably going to be mitigated by the negative sentiment created by the uncertainty,” said Paul Radeke, vice president at KDV Wealth Management in Minneapolis, according to CNNMoney.

“The longer it goes on, the more it looks like neither side wants to budge,” Kenny Landgraf, founder and principal at Kenjol Capital Management in Austin, Texas, told CNNMoney.

“The market hates the uncertainty.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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