Fiscal Cliff Deal Sets the Stage for Market Turmoil


By STEVE ROTHWELL

When lawmakers delivered a long-delayed, last-minute agreement on the budget, Wall Street celebrated. And it would be easy to think that the surge in the Dow the following day meant that investors had put their concerns about Washington's political gridlock behind them.The Dow Jones industrial average surged on the news, but that doesn't mean the volatility is over. In fact, there could be more turmoil in the market soon because decisions on cutting the federal budget deficit have been put off until March, when the government will reach its borrowing limit. Republicans have already said they will demand cuts to spending as a condition for extending the limit.

"The uncertainty is still there, the key issues are spending cuts and entitlement reforms and, for the most part, those were not addressed," says Terry Sandven, chief equities strategist at U.S. Bank Wealth Management. "This sets the stage for sharper rhetoric and increased market volatility as these discussions evolve."

The last time lawmakers tussled over the debt limit, the stock market plunged and the U.S. government lost its AAA debt rating. The Dow fell almost 7 percent in the two weeks before an agreement was reached Aug. 3, 2011.

Many business leaders objected to the agreement lawmakers reached late Tuesday. The Business Roundtable, an association of chief executive officers of leading U.S. companies, said that although it addressed some of the immediate negative consequences that the economy would have faced going over the "fiscal cliff," it failed to address the "serious and fundamental" reforms the economy needs. The National Retail Federation said that the deal was welcome, though it was only the first step in necessary tax reform.

Companies are likely to remain wary of investing until they get more clarity from Washington, says Joe Heider, a principal at Rehmann Financial in Cleveland, Ohio. He likens the current U.S. business climate to a sporting event where the referees tell the players to take the field before telling them that the rules of the game will only be decided on once the final whistle has been blown.

"Washington needs to get out of the way of the financial markets and American business," said Heider. "They need to create some certainty over how businesses should best deploy all the cash that they're sitting on."

And corporations are sitting on a lot of cash. Companies have been steadily building up their reserves over the last five years and are now sitting on record cash piles. By the end of the third quarter of last year, S&P 500 companies had accumulated more than $1 trillion in cash, according to data from S&P Dow Jones Indices.

At least for now, companies are unlikely to invest much of that money back into their businesses simply because demand just isn't strong enough, says U.S. Bank's Sandven. Instead they will spend it on acquisitions, stock buy-backs and pay higher dividends. Those are all actions that should boost stock prices in the near term, despite the ongoing uncertainty and increased volatility that will be caused by political wrangling.

Investors should take advantage of any volatility in the market created by the political wrangling to seek out stocks that have a history of growing their dividends, says Sandven. He estimates that half of the stocks in the S&P 500 have a dividend yield that is higher than the current 10-year U.S. Treasury note. The 10-year Treasury note was at 1.90 percent Friday.

He also recommends that investors buy the stocks of companies that have exposure to emerging markets that have a growing middle class and don't have the same debt issues as the U.S.

Joseph Tanious, a global markets strategist at J.P. Morgan Funds, says investors would be wise to remain calm when the negotiations in Washington around the debt ceiling start to heat up this spring.

The stock market dropped sharply in the weeks after the election Nov. 6 as investors worried that a divided government wouldn't get a deal done in time to meet a budget deadline by the end of the year, but it has rebounded since then. The S&P 500 is now 2 percent higher than it was on election day, even after falling by as much as 5 percent in the two weeks following the vote. On Friday it closed at 1,466, the highest since December 2007.

"When push came to shove, Congress did come together to reach an agreement," says Tanious. "Many people were saying you should be out of the market ... (that) markets are going to capitulate, and that didn't happen."

Stocks have rallied over the last three years as investors remain optimistic that the economy will maintain a slow, but steady, recovery from recession, as the housing market improves and as the outlook for jobs gets better.

And while investors also see the wisdom in addressing the nation's long-term debt problems, they point out that businesses and consumers have been aggressively paying down their own debts in the aftermath of the 2008 financial crisis. That leaves more flexibility for people and companies to shop, invest, and spend money, helping to lift the economy - and the stock market - even if Washington's political dysfunction worsens.

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drbuckles

Who sets the economic policies of most countries ?

Not the poor, the middle class or the upper class, but rather the extreme gilded class.

The gilded class does their best to pay for and get elected sufficient majority or obstructionist representatives to have their own way, and with a few exceptions, the gilded classes are not a charitable and progressive lot.

The gilded and rentier classes prefers a Dickensian wonderland, where labor is cheap and real estate and investment generating assets are beyond the ownership reach of the gilded class; i.e. the gilded want to literally own everything worth owning so their rents, royalties and unearned income cup runneth over to infinity.

That's why American hedge funds and private equity firms are buying up foreclosed homes right now, so they can generate handsome double-digit profits while relegating former homeowners into permanent tenant status; the rich get richer and the poor get poorer.

Absent revolution, the 98% have no representation anywhere; they are subjects of the gilded economic policies of repression and that's the way the gildeds like it.

Warren Buffet said the rich have been waging class warfare for years...and they're winning.

They win it by hijacking the tax code, economic policies, banking policies and interest rates for massive economic repressive impact that lines their long-term pockets while shattering the masses economically.

January 07 2013 at 3:23 PM Report abuse -1 rate up rate down Reply
1 reply to drbuckles's comment
mrspelosi

I know what you mean. Thank you for recognizing that people like me and President Obama were bought an paid for darling.

One other thing. Your copy and paste posts are quite boring and not very becoming. Try coming up with something on your own next time dear.

January 07 2013 at 5:35 PM Report abuse +1 rate up rate down Reply
mrspelosi

Did everyone see me being interviewed on the news channels this weekend. I did my usual stammering and incoherent babbling. The one thing I did make clear was that I want more tax increases and guess who I am going after again the middle class. I do not care where the tax increases come just as long as we get them darlings.

January 07 2013 at 1:48 PM Report abuse rate up rate down Reply
1 reply to mrspelosi's comment
Big John

Why do you worry about those not in power? It is those in power you need to be concerned about and with Boehner in power you better be concerned!

January 07 2013 at 5:01 PM Report abuse -1 rate up rate down Reply
1 reply to Big John's comment
mrspelosi

Little John darling, at least that's what I have heard doll, which is unfortunate for you. You are right about those in power. I know you meant President Obama and with him in power everyone should be concerned and also be sure to hold onto your wallets. You know how we democrats love to get our hands on other people money and spend spend spend, dearest.

January 07 2013 at 5:33 PM Report abuse +1 rate up rate down
toosmart4u

facts22 says europe will out do the US. in 2013. They have socialized medicine which we do not have and therefore we cannot compete with europe while our companies pay for health care. We need the Obamacare to improve to the system in Europe and Canada.

January 07 2013 at 12:44 PM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment
mrspelosi

Oh my. You really are notsosmart are you dear.

January 07 2013 at 1:44 PM Report abuse -1 rate up rate down Reply
thefacts22

Well our economic problems keep piling up,NBC has at last admitted that European markets "except France"will outperform USA markets in 2013......It is now clear,that Germany,s austerity measures are working ,and Spain has announced that exports are booming......We keep having problems,due to our spending problems,if we not stop,we will go into another bigger recession......oba,s hell care is NOW openly admitting that the cost will be 3 times higher than estimated.....There is no question that oba,s incompetence,and idiology will further damage our economy.....and just wait until the next rigged "job report",no matter how they cook the numbers will be dismal

January 07 2013 at 9:20 AM Report abuse +2 rate up rate down Reply
2 replies to thefacts22's comment
dembaitnswitch

Obama doesn't want our market or economy to recover, all his legislation does just the opposite.

January 07 2013 at 11:58 AM Report abuse +1 rate up rate down Reply
Big John

Why do all you Republicans only worry about spending when you are not in power? I never heard from one of you when Bush and his fellow Republicans were spending like drunken sailers.

January 07 2013 at 5:04 PM Report abuse -1 rate up rate down Reply
1 reply to Big John's comment
mrspelosi

So little John and I am being generous in what I have heard calling you that dear. So in other words you are complaining about President Bush's spending, most of which was mine dear. But I guess you think it is ok to give President Obama and his reckless spending a pass. Such a hypocrite you are.

Oh and you might want to do yourself a favor darling. Try getting some help for your George Bush derangement syndrome, doll.

January 07 2013 at 5:42 PM Report abuse rate up rate down
nhpb

How about these idiots in Washington start acting like adults and submit a budget and a 10 year plan to get this country back on financial track. This serial crisis brinksmanship causes uncertainty and us little guys can't plan our personal or business future. These bums in Washington on both sides of the aisle need to get their respective snouts out of the trough and face reality. There is no free lunch and the burdens they are placing on this and future generations is unconscionable. A trillion dollar coin isn't the answer... sound financial management is. Everyone, not just some, need to pay more and all need to take less.

January 07 2013 at 8:09 AM Report abuse +6 rate up rate down Reply
scottee

stocks are based on what?
our dollar is based on what?

January 07 2013 at 8:04 AM Report abuse +3 rate up rate down Reply
cpo1514

AAA debt rating, coupled with ther US Attorney selling guns for the Occupant, Lybia Ambassador KIA with a few 'good men' , and now the Fiscal Cliff (self inflicted) ? What next to lower the approval of this failed presidency ???/ And HP thinks its the economy... the economy is but one small piece of inept management of the USA. And yet the uninformed will vote for the freebies.

January 07 2013 at 8:04 AM Report abuse +3 rate up rate down Reply
dencuddy

The last time daily Finance cried disaster over the fiscal cliff, stocks rose 308 points. You guy are always wrong.

January 07 2013 at 7:49 AM Report abuse -2 rate up rate down Reply
maa2626

stocks react to the artifically low interest rates, they buy back stock, take companies private, executives borrow at 1 percent and loan it to the company at 4 percent etc, etc. Interest rates need to rise so companies will spend the cash. business also needs clear policy on taxes, trade policy and healthcare from the feds.

January 07 2013 at 6:44 AM Report abuse +2 rate up rate down Reply