12/11/12 – Y2.013K?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Dec 11, 2012 12:01:48 PM

and tagged Fiscal Cliff, Market Updates

Leave a comment

I have spent quite a bit of time reading, thinking, and writing about the fiscal cliff, going into its potential risks and damage in some depth. While it’s certainly appropriate to analyze the situation, something occurred to me the other day: Could this be another Y2K?

You may remember it—the disaster that didn’t happen. Despite the predictions of nuclear power stations melting down and airliners dropping from the sky, the millennial New Year celebrations went just fine, and the world was still there the next day.

The reason everything went so smoothly, of course, wasn’t that there was no problem—there was—but because the panic had led everyone to think through the consequences and solve the problems before they hit the fan. The panic led to the solution, in a way that probably couldn’t have been replicated with less hype.

I’m sure you see where I’m going with this. As much as most of us hate the panic surrounding the fiscal cliff, there’s no denying that it has concentrated minds in Washington, D.C. Slow progress seems to be continuing, per “Obama-GOP Cliff Talks Take Positive Turn” on page A4 in the Wall Street Journal. Other articles discuss how, this time, Boehner has his troops more in line (see “Boehner’s Test: Keep GOP Ranks Behind Him,” on the front page of today’s WSJ). After the debt-ceiling debacle last year, and given the election results, the focus is clearly on getting a deal done. The fact that failure will mean bigger tax hikes and military spending cuts only adds to the incentive from a Republican point of view.

I suspect that the talks underway are indeed serious and could result in a bigger deal than anyone expects. The main reason I think this is that the meeting has been cut down to the principals, and no one is talking to the press. Despite the ongoing coverage, the politicians are doing their job. With expectations so low, and the possibility of failure discussed more and more, the chances are rising for a positive surprise. “No Time for Cliff Worries: Some Chiefs Keep Spending” on B1 in the WSJ notes that many companies are looking past the cliff and making plans for success regardless. To the extent that this reflects a general attitude, it sets the stage for a minimized downside if we do go off the cliff and a positive upside surprise if we don’t.

We’re a long way from a done deal, and even further from seeing it actually passed. The Republican House remains the biggest obstacle to proposals involving tax increases, which any deal certainly would. On the other hand, depending on the spending cuts involved, the Democrats might be the problem. We just don’t know. I do know that, as things continue to get worse, it’s worth remembering Y2K and the fact that the panic actually led to a solution.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

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 into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) 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.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at 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®