The Independent Market Observer

11/15/12 – Back to the Wall of Worries

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Nov 15, 2012 8:40:46 AM

and tagged Fiscal Cliff, Europe

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Markets got knocked again yesterday, as November proves to be a tough month. After the run of good news we had for a while, the bad, or at least worrisome, news is starting to pile up.

The first piece of worry is the rollout of Obama’s strategy to resolve the fiscal cliff. By starting off with a plan to raise additional revenue of $1.6 trillion—about twice what had been discussed last year with the House leadership—he has drawn a line in the sand that indicates compromise won’t be a given. This made the front page in both the Financial Times (FT), with “Obama throws down tax challenge,” and the New York Times (NYT), with “Obama Details Lines of Battle in Budget Plan.”

Much of the press coverage over the past week has been on the pressure Obama’s constituencies, such as labor, are placing on him to tax the rich, and he appears to have responded. Markets looked at the increased potential for the government to go off the fiscal cliff and shuddered.

The second piece of worry is the Israeli air strikes on Gaza and assassination of the Hamas military commander in response to rocket strikes on Israel, which made the front pages of the FT, the NYT, and the Wall Street Journal (WSJ). Strife in the Middle East isn’t new, but the timing refocused market worries about what else Israel might do, such as strike at the Iranian nuclear program. The U.S. Navy is certainly aware of the possibility, as a story on page A8 of the NYT, “Navy Rushes to Persian Gulf Robotic Tools to Clear Mines,” makes clear.

The final piece of worry is Europe. Mass protests against the austerity regimes took place yesterday, with pictures and stories on the front pages of the FT and WSJ. As I said last week, we are moving out of the eye of the European hurricane and back into the storm. Greece continues to struggle, and even Ireland is wearying of austerity. The European governments get it: Spain will apparently be given a pass this year despite subpar performance, and it looks like a way will be found to cut Greece more slack. That said, the risk level appears to be on the rise again, with the NYT reporting on page B8 that the German “Bundesbank Still Sees a Threat From the European Crisis.”

All of these factors have combined to make investors much more nervous than they were, and that has weighed on stocks. I expect to see this continue, as the political logic of hanging tough and playing hardball continues to be compelling for both sides.

That said, though, there are some hopeful signs. In the House election contest I mentioned yesterday, the relative moderate won, potentially making a compromise deal easier. Also, as many of the stories continue to mention, even as both sides play to their bases, they’re careful not to rule out measures that would allow a compromise. A story on page A4 of the WSJ, “Obama Presses For Higher Taxes, but He Adds Caveats,” is a good example of this.

So far, as expected: grandstanding, volatility, worries. We can expect more of the same, unfortunately, but none of this rules out a good resolution in the end. Here’s hoping.

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