The Independent Market Observer

12/3/12 – And One Step Back?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Dec 3, 2012 4:55:44 AM

and tagged Fiscal Cliff, Politics and the Economy

Leave a comment

Sort of. The White House has made an initial fiscal cliff proposal, which the Republicans have rejected out of hand. The headlines are portraying the Republican dismissal of the proposal as a problem, but the markets seem to be taking it in stride. I suspect the markets are right on this one.

To truly assess the situation, we need to evaluate the reliability of the news coverage. The different ideological takes of the papers are becoming more apparent, particularly today. The underlying dynamic of the news cycle is also worth considering. Both of these factors affect what we will be seeing over the next month as the clock ticks down.

Let’s look at the news cycle first. Just as with the election, where you could predictably chart the “Romney up/Obama down” and “Obama up/Romney down” cycle, we now have the same pattern in the fiscal cliff coverage. Last week was optimism, this week is pessimism. I expect we will soon see optimistic reports again about how the parties are coming together after all.

The difference in coverage between papers is also becoming more stark. The Wall Street Journal (WSJ) had “Obama’s Cliff Offer Spurned” on the front page, while the New York Times (NYT) put the fiscal cliff story back on page A23. Instead, the NYT featured a long front-page story titled “Complaints Aside, Most Face Lower Tax Burden Than in the Reagan ’80s.” The Financial Times (FT) also included a piece on Boehner’s rejection of Obama’s proposal, but it was a small teaser below the fold. Clearly, both stories are important, but the difference in focus (the negotiations in the financial papers and a detailed article supporting what is essentially the Democrats’ position in the NYT) shows what each paper’s take is.

On both sides, though, the story is essentially that there is no progress. I disagree, as no agreement yet doesn’t necessarily mean no progress. Both parties have to create a record that allows them to say “we did our best” to their core supporters before ultimately compromising. What we’re seeing now is entirely consistent with creating such a record, and the timeline still allows for an agreement before the end of the year.

Not only that, the papers are actively throwing out discussion on various options. Besides the front-page NYT article I mentioned above, the WSJ has two articles on A4, “A Menu of Revenue-Raising Options” and “Charities Fight to Keep Deduction for Donors,” that review how both sides might agree and disagree. The discussion continues—and remember, anyone who agrees to anything too easily is going to be accused of leaving money on the table.

Consider a duck, gliding along the water. On the surface, it seems to be moving smoothly. Below the waterline, however, that same duck is kicking its little feet pretty darn hard. While we certainly can’t say that the negotiations are gliding along smoothly, we can be pretty sure that, below the surface, a lot of activity continues between staffs and within each party.

While Thursday's back-and-forth between Boehner and the White House isn’t good news, it’s not bad news yet, either. Both sides are still on a reasonable path between public posturing and private negotiation, and, although the clock is ticking, we’re not close to midnight.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®