Tower Private Advisors
- More fiscal cliff
- More complacency
Capital Markets Recap
After last night’s market closed, House Speaker John Boehner said he was pulling the Fiscal Cliff vote because he
would have looked like an idiot wouldn’t have had enough Republican votes to pass it. Giving some insight into how markets might react in the next few days if things go badly, S&P 500 futures were down as much as 3.72% overnight. That’s the equivalent of 495 Dow Jones Industrial Average points.
Several weeks ago, I decided to take a look at how the fiscal cliff debacle might play out if it followed the same path as with the 2011 Debt Ceiling debacle. I assumed that July 31, 2011, was the nadir of the debt ceiling. That’s when Congress agreed to raise the debt ceiling. August 5 was when Standard & Poor’s downgraded the U.S.–not because of the increase in the debt but because of the disfunctionality of Congress. For the current market I aligned December 31, 2011. Both charts start 91 days before those dates. If history does something like rhyme, the past may prove to be prologue with respect to the stock market, and today’s [at one time] nasty drop came just a day or two early. One thing that can’t be handicapped is the ability of Congress to screw things up–and on the rare occasion–to work together, so this chart shouldn’t guide your investment decision, just provide some context for it. I’d say there are good odds that stocks get some additional markdowns over the next week and a half.
Why does that make me think of this?
I don’t get it, though. For some reason investors seem to think that Congress will come through this time. It doesn’t matter that they didn’t in 2011; it doesn’t matter that stocks do better when Congress isn’t in session. What am I missing? Here is a sentiment survey of the National Association of Active Investment Managers. Based on past gauges of sentiment, these folks are in the near-giddy category. Since 2006, there’ve been only about 10% when they’ve been more optimistic. It doesn’t take a trained eye, though, to see that their sentiment tracks the market. Here’s the formula and you, too, can be an Active Investment Manager: market up → enthusiastic; market down → pessimistic. If, on the other hand, you want to be a successful investment manager, you want to invest when they’re on the pessimistic side of things; not when they’re optimistic. Right now, they’d be hard pressed to be more optimistic, so you should be less than that.
Here’s another view of the same phenomenon. This comes from sentimenTrader. It’s a chart of investor Risk Appetites. It shows near peak “comfort with risk.”
All fiscal cliff, all the time…here are five headlines in no particular order. (All respectfully lifted from the daily CFA Smartbrief.)
- Fiscal cliff talks start to produce some progress
- Obama’s fiscal cliff offer becomes closer to GOP plan
- Boehner proposes backupl plan to avert fiscal cliff
- Obama threatens to veto Boehner’s fiscal cliff plan
- Boehner gives up on his fiscal cliff plan
Here’s a new twist:
- Tax-refund delays could be enough to send U.S. into recession.
Have you heard of the dairy cliff?
- Failure to pass farm bill could send milk prices soaring…”milk prices across the U.S. could soar as high as $8 a gallon January 1.”
There does seem to be some agreement, however, on what might transpire after we hear the last of the accursed fiscal cliff:
- U.S. economy could grow faster than expected in 2013, experts say
- “If fiscal cliff can be managed, U.S. economy is poised to grow” [from Strategas Research Partners]
- AdvisorShares is set to launch ETF linked to business cycle
- Trading begins for 3 FlexShares dividend-focused ETFs
‘Tis the season for annual forecasts, and here are the results of a survey of CFA Smartbrief readers, who answered the question, “Do annual market forecasts commonly circulated by Wall Street’s sell side have value to professional investors?
- They are interesting to read but of limited value – 65.66%
- No, they amount to nothing more than marketing gimicks – 25.87%
- Yes, they help in positioning portfolios for the year ahead – 8.47%
And from the companies that gave us these two gems (below) we can expect more automotive excellence…”GM and Peugot Citroen will jointly build 3 types of cars.” ‘Matter of fact, maybe it’s just some sick, incestuous get together, as it looks like these two were separated at birth.
As usual, there were several economic cross currents this week. In housing, the NAHB Housing Market Index remained at relatively elevated (relevated?) levels, while Mortgage Applications fell by (-)12.3%; Housing Starts were not as good as expected; Building Permits, better than expected. Regional economic surveys (Empire State Manufacturing, Philly Fed, Kansas City Fed) were on the weak side, while Core Capital Goods Orders (excluding defense and transportation) were stronger than expected. Personal Incomes were up considerably more than expected, but University of Michigan Consumer Confidence was weaker than expected. It’s probably reasonable to think that this accursed fiscal cliff nonsense is behind the cross currents.
Still, here’s an aggregated look at the economic picture. To the extent that expectations are priced in to markets, actual results that are better (worse) than expected should drive markets higher (lower.) Therefore, the Citigroup Economic Surprise index is a good way of looking at this dynamic. This suggests that, at least relative to expectations, the economy is improving. Based on my characterization, we’re in the Improvement Quickening zone.
Here’s wishing you a Merry Christmas. If you don’t celebrate the holiday, at least have a nice day off work next Tuesday. Thanks for reading this far.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors
Tags: Fiscal Cliff