Fiscal Cliff Negotiations - Much Noise, Little Progress

The Dow Jones Industrial Average (Dow) rose 0.12%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.66%, the Standard & Poor's 500® Index (S&P 500) added 0.51% and the NASDAQ Composite Index (NASDAQ) tacked on 1.46%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Utility sector ...

December 03, 2012    |    By Mike Schwager

Performance for Week Ending 11/30/12:

The Dow Jones Industrial Average (Dow) rose 0.12%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.66%, the Standard & Poor’s 500® Index (S&P 500) added 0.51% and the NASDAQ Composite Index (NASDAQ) tacked on 1.46%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Utility sector (+3.48%) was the best performer while Energy (-0.63%) was the worst.

Index* Closing Price 11/30/12 Percentage Change for Week Ending 11/30/12 Year-to-Date Percentage Change Through 11/30/12





Wilshire 5000




S&P 500








*See Last Page for Index Definitions    

MARKET OBSERVATIONS: 11/26/12 - 11/30/12

The major market indices finished the week modestly higher as further evidence the U.S. economy remains on firm footing outweighed the stalemate surrounding the fiscal cliff negotiations. Despite the gains, trading was very choppy as investors reacted to the political brinkmanship and high drama coming out of Washington.

Fiscal Cliff
The ongoing negotiations between politicians have made for great political theater but the back and forth rhetoric has led to much uncertainty amongst investors. While deal making in Washington has historically been done out of the spotlight, the “sausage making process” is now front and center, which in turn is leading to elevated levels of market volatility. While I still believe some sort of eleventh hour deal will be put together, the path to resolution will surely be bumpy with many twists and turns between now and the end of the year.

On Thursday, the Obama administration laid out their “opening bid” by seeking tax increases of $1.6 trillion for top earners over the next decade. The proposal also included new funding for infrastructure spending and a $400 billion reduction in entitlement spending. The deal was deemed a non starter by Republican leaders who remain dead set against raising marginal tax rates on high income earners, although they do remain open to increased tax revenues from closing loopholes and capping incentives. 

The proposal put forth by the Obama administration was likely an effort to shoot for the stars in hopes of getting the moon. In other words, I believe they essentially showed their “wish list” but only in the sense that this is a starting point and not a hard line in the sand. To wit, in a sign that there is flexibility and room for compromise, Obama signaled that while tax rates for high earners should increase, he is not insistent that rates rise to the peak Clinton-era levels. For top earners, if no agreement is reached, rates would revert back to 39.6% from the current 35% rate.

FED Signaling More Easing Ahead
A front page Wall Street Journal article last week suggested that the Federal Reserve (FED) is likely to keep its foot on the monetary gas pedal in 2013.  The article from Jon Hilsenrath noted that "after an aggressive push to restart the lumbering U.S. economy, FED officials are nearing a decision to continue those efforts into 2013 as the U.S. faces threats from the fiscal cliff at home and fragile economies elsewhere in the world.” Since September, the FED has been buying $40 billion a month of mortgage-backed securities and that program looks set to continue. The more urgent issue however is what to do with the $45 billion-a-month program known as Operation Twist. That program is scheduled to end in December, but, according to Hilsenrath many FED officials want to keep buying long-term Treasuries as a complement to the $40 billion a month mortgage purchases. This suggests that the current bond purchase rate of $85 billion per month will likely be sustained for the foreseeable future. The investment community tends to pay attention to Hilsenrath as he is known to have a direct pipeline into the FED and has been used in the past to “telegraph” the FED’s thinking. High levels of liquidity, courtesy of Dr. Bernanke and the FOMC, have been supportive of risk assets and this is likely to remain the case until economic conditions improve.

Beige Book
The FED’s Beige Book report was released last week. The report, which compiles snapshots of business conditions in each of the 12 FED bank districts, indicated that economic activity expanded at a “measured” pace during the most recent period. Consumer spending was reported as moderate, manufacturing weakened in seven of the districts and several districts saw gains in real estate. Wage and price pressures were mostly subdued and six districts reported gains in employment.  To be expected, a number of districts cited "concern and uncertainty" surrounding the fiscal cliff. Overall, the report confirmed recent data trends—i.e. softer manufacturing, a firmer tone to the real estate market, disruptions due to Hurricane Sandy, subdued pricing pressure and no significant improvement in jobs as hiring remained "sluggish." 

Economic Roundup
Economic data remained supportive of a modestly growing economy. On the jobs front, the Labor Department reported that initial jobless claims during the week ended November 24 fell by 23K to 393K. The report reversed a good portion of the recent spike in claims associated with Hurricane Sandy. Elsewhere, the first revision to the third quarter GDP data showed the economy growing at a 2.7% rate, well ahead of the original 2.0% estimate. The uptick in growth reflected a narrower trade deficit and higher than expected gains in inventories. On a negative note, personal consumption was revised to 1.4%, much weaker than the initial estimate of 2.0%. Housing remained a bright spot with pending home sales jumping by a much better than expected rate of 5.2% in October. In addition, mortgage applications to purchase property rose for the fourth time in 5 weeks and are now up 8.1% on a year-over-year basis.

While investors will remain on edge over the fiscal cliff negotiations, we are also set to enter a seasonally favorable time of the year. According to Barclay’s Research, since 1953 the S&P 500 has posted an average gain of 1.59% during the month of December with positive results 75% of the time.

The Week Ahead:
The focal points of the upcoming week will be the ongoing fiscal cliff negotiations as well as Friday’s Payroll data. According to Bloomberg, economists are calling for the report to show a 90K gain in nonfarm payrolls and for the unemployment rate to hold steady at 7.9%.  Private payrolls—which filter out government hiring/firing—are expected to rise by 90K.  Other reports of interest include: ISM Manufacturing and Non-Manufacturing reports, monthly auto sales, initial jobless claims, and the University of Michigan consumer confidence report on Friday.


While uncertainty surrounding the resolution of the fiscal cliff will likely weigh on near term stock performance, expectations of an eventual solution should set the stage for higher asset prices as we approach the end of the year. Domestic growth has been gaining traction reflecting the resiliency of the consumer and the improving housing sector.  While the political “noise” will dominate the investment landscape in the near-term, equities remain attractive on a longer term basis reflecting the combination of attractive valuation, the overall healthy nature of corporate balance sheets and the commitment from the FED to maintain accommodative monetary policy through at least mid-2015.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.


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