Everybody says not to worry about the “fiscal cliff.” And that scares the heck out of me.
Our elected officials in Washington D.C. tell us not to worry about the looming tax hikes and spending cuts scheduled to take place on January 1. They promise to figure something out.
All the analysts and talking heads on all the financial television shows tell us there’s nothing to worry about.
[ad#Google Adsense 336×280-IA]A bunch of financial newsletter writers – including some of my colleagues at S&A – say not to worry.
My friends say everything will work out just fine.
And even the two guys who delivered my Christmas trees to my house last night called the idea of the fiscal cliff “nonsense.”
But that’s why I’m worried.
You see, I’ve learned that when everyone says not to worry about something, that is precisely the time you should be worried…
Do you remember what happened in July 2011? That was the last time everyone was saying not to worry…
The U.S. government was approaching the debt ceiling. Congress and the president were at odds with each other. Congress didn’t want to raise the ceiling without working out some sort of spending concessions. The president wouldn’t agree to spending cuts without some sort of tax increases.
As the deadline approached, the stock market rose and fell based on the headlines coming out of the negotiations.
Stocks rallied when it looked like a deal was coming together. They fell when it appeared negotiations had stalled. But everyone reminded us not to worry – we’d all get through this mess somehow.
Of course, we did get through that mess… sort of. Our politicians agreed to kick the can a little farther down the road. They raised the debt ceiling and kept the government open for business in exchange for a promise to settle the taxing and spending issues at a later date.
The crisis was averted. And as the politicians congratulated each other with handshakes and back slaps, they reminded us how silly we were to worry. They told us they would get us through the debt ceiling crisis, and they did.
Then the stock market dropped 15% in one week.
Take a look at the action during the 2011 debt ceiling crisis…
I’m worried we may be facing the same situation today.
The fiscal cliff isn’t the problem. In fact, I think the market wouldn’t mind at all if we tumbled over it. At least then we would be making some minor progress toward deficit reduction.
What we ought to be worried about is if Congress and the president decide on “more of the same” – more taxes on the “rich” now and plans to cut spending later. That is what shook the market last year. And there’s the potential for something similar to happen this time around.
I’ve been writing about the potential for a year-end stock market rally for the past few weeks, and I’ve been sticking to my year-end target of 1,430 for the S&P 500. So the drop down near 1,350 just over a week ago was a gift, and I was a willing buyer.
But I’m not buying today. With the S&P 500 now trading at 1,410, there just isn’t enough upside potential to justify taking the risk that the market will nosedive if our politicians reach an agreement for more of the same.
That doesn’t make me bearish here… just cautious. If stocks pull back and retest their recent lows near 1,350, the risk/reward setup becomes favorable again… and it’ll make sense to start buying.
Best regards and good trading,
Jeff Clark
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Source: The Growth Stock Wire