Tags: Wolinsky | fiscal | cliff | hedge

It's Time for Investors to Get Fearful

Thursday, 20 Sep 2012 07:44 AM

By Jacob Wolinsky

In less than 3 ½ months, an event is scheduled to occur that will crush the slow-growing American economy. The event is not the end of the Mayan Calendar, but the coming fiscal cliff, which is set to take place Jan. 1, 2013.

The fiscal cliff is a combination of automatic spending cuts and tax increases, which will become mandatory unless Congress gets a plan together. The non-partisan Congressional Budget Office predicts that, unless Congress acts, the fiscal cliff will cause unemployment to rise over 9 percent and the economy will enter into a recession.

The chances of a compromise appear increasingly dim. Congressional leaders are more concerned with their upcoming elections. The president has polarized the country like no one else before him and is busy trying to avoid the unemployment line and get some golf in.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

What makes the event so peculiar is how the stock market has reacted. The stock market is known as a leading indicator. This means that the market usually moves months before the data is revealed in economic data. The stock market usually is three to nine months ahead of the economy.

A good example of this is the Great Recession. The stock market bottomed in March 2009, when the economy looked awful. The economy officially exited the recession in June 2009. By that time, the stock market was up over 25 percent. Additionally, the announcement of the end of the recession came far after June 2009. That is what makes timing the market so hard.

Here is what is so peculiar about today’s market: it does not seem to be concerned at all about the upcoming fiscal cliff. Usually when everyone knows about upcoming events, it is said to already be priced into the market. One would think that, in this case, the market would decline, as nervous investors sell off ahead of the New Year. However, the exact opposite has happened.

The Standard & Poor’s 500 Index recently closed at its highest level since December 2007, close to five years ago. Besides the worries in America, things in Europe are still not fixed, China is going through economic and political chaos and the Middle East is on fire. Why investors have not reacted to these events is unknown.

However, this could be one of those moments when the market is too optimistic and failing to account for all these economic and political problems. Since the market can almost never be timed it is foolish for investors to sell all their stocks or do something drastic like that. However, it could be an opportune time to close some positions and possibly consider a hedge against the upcoming financial uncertainties.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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