Of Fiscal Cliffs and European Protests

 

Now that the election is over, the markets decided to extricate themselves from the tunnel vision about who will run the government, and widen their sights to see what threats our money faces next. Well, it didn’t take too long to figure out that the number one issue facing the markets is the “fiscal cliff.” This risk is what I have been calling a toxic cocktail of federal budget cuts to critical areas such as defense, combined with the end of the Bush-era tax cuts. This double-pronged threat to the country’s GDP could be huge. If the president and Congress fail to reach an agreement by the end of the year, a recession is the most likely outcome.

 

As of this writing, the president had yet to meet with Congressional leaders on this issue, although he has met with labor and “progressive” leaders about what they think should be done. Today, the president is making an appearance to business leaders to hear some of their views on a solution. I think most of this communication is lip service. But in the interest of political preservation, I suspect we could get some kind of deal that at least staves off most of the defense cuts and most of the tax cuts. I do think, however, that those making more than $250,000 a year can expect to pay higher taxes starting January 1, 2013.

 

The consequences of a failed fiscal cliff deal, and the possibility that there will be more pain spread to businesses as a result, has sent traders running for the exits ever since the president was reelected.

 

The chart below of the S&P 500 Index clearly shows a drop during the past week that has taken the broad measure of the domestic equity market below key technical support at the 200-day moving average (red line).

 

 

To make matters worse, market leaders such as Apple (APPL) really have been sold off here, with Apple now in bear market territory, having crumbled more than 20% from its most recent high.

 

Other negatives hitting this market now are the renewed protests against fiscal austerity measures in Europe. Today, we saw many people take to the streets throughout several European countries, all in an attempt to make it clear that they don’t want to sacrifice government benefits for a European Central Bank-funded bailout. The protests caused some big selling in European equity markets, and that selling has translated into more downside in the U.S. markets midway through Wednesday’s trading session.

 

To be certain, there are a lot of headwinds in the market right now, with the fiscal cliff and European social unrest being the two most immediate issues. Past these, we have fears about a global economic slowdown, slower corporate profits, and more uncertainty over Europe’s ultimate bailout resolution.

 

Until these issues are at least partially on the backburner, look for a buyers’ strike in equities — and that means a choppy, plodding market until headlines dictate otherwise.