We've cleared the fiscal cliff, but there are more perils than positive omens that await us as the new year unfolds, notes Richard Lehmann of Income Securities Investor.
The fiscal cliff issue played out pretty much as predicted here last month, i.e. we went over the cliff so Republicans could vote on tax reductions rather than tax increases. On the question of spending reductions, Congress kicked the can down the road for two months.
This set us up for one of the all-time biggest budget battles, in which the authorization to increase the debt ceiling or shutting down the government will absorb media and market attention for the next two months-or even longer.
This will get ugly since the President has lost his main talking point, taxing millionaires and billionaires, and will have to defend spending levels not supported by the majority of the public. This means demagoguing Republicans rather than debating the merits of various policies and mandates. Expect to see a revival of Granny being pushed over the cliff by a Paul Ryan lookalike.
To understand why I am not optimistic on spending cuts, you need look no further than the Hurricane Sandy relief bill. Out of a $60 billion total, only 30% pertains to direct hurricane relief and remedy. The rest is for unrelated earmarks.
Our government today continues to be run on the philosophy, "A crisis is a terrible thing to waste." This also means, if you don't have a real crisis, create one such as a fiscal cliff, sequestration, or a government shutdown.
In the coming years, expect to see our government running from crisis to crisis, created or contrived, in order to meet political ends. This translates into market volatility, but it also means an uncertain business climate in which risk taking is discouraged.
Despite the 300 point run-up in the Dow Industrials on January 3, this is far from what you can expect for the rest of the year. Beware of the market pundits who appear nightly on the business shows to tell you about the good times ahead. You want to think defensive-and I don't mean defensive stocks.
Today's markets are subject to high-speed institutional trading that drives volatility. The income securities we buy for clients and recommend here are not as vulnerable as most NYSE stocks because they usually aren't big enough to be traded in the volumes needed for the trading done by computers. Yes, they will reflect that trading, but much less so.
Also, when you buy for income, the price fluctuations don't affect you over time unless you buy a mutual fund. This is why there is a growing trend out of such funds and into buying individual securities and ETFs.
2013 shows little promise today, but it may yet show promise for the second half. Then again, things have a lot of room to worsen. Stay tuned.