This preoccupation with the fiscal cliff is, frankly, driving me nuts.
I thought I was over it a few weeks ago. But it’s gotten much, much worse. You can’t go anywhere without reading or hearing about the doomsday deadline when taxes increase and spending cuts kick in, potentially delivering a $500-billion double whammy to the economy.
Markets move up and down based on the Washington rumor mill. On Tuesday, the Dow Jones Industrial Average closed down 89 points after Senate Majority Harry Reid (D-Nev.) said lawmakers were making “little progress” on negotiations to avoid going over the cliff by year end. On Wednesday and early Thursday, stocks rallied after some hopeful statements by President Obama.
But for all of Wall Street’s moaning and groaning, the market has hardly corrected at all over the past few weeks, and the key VIX volatility index has barely budged. Maybe investors are venting their anxieties but voting with their wallets: Ultimately, they expect a deal. Only nervous traders are reacting to every twist and turn of this Beltway soap opera, and they’ll pay the price.
If a deal gets done, it will most likely happen just before Christmas, so Congressmen and women can enjoy a cushy holiday of eggnog and fund raising back home.
They won’t work out all the details, but there may well be some kind of framework of a final resolution by then, as the President suggested Wednesday.
I say this with all due humility—because, as I wrote here, when it comes to the cliff, “nobody knows anything” about what’s going to happen, including me (although two years of writing a political blog has made it clear to me that markets and politics operate by different rules).
But this is my best guess based on what the market is doing.
From its recent closing peak of 1,465.77 on September 14, the Standard & Poor’s 500 fell to a closing low of 1,353.33 on November 15 in the post-election sell-off.
That’s a decline of only 7.7%, barely in correction territory. (We saw an almost identical 7.8% pullback from early April to early June.)
By contrast, there was nearly a 16% drop from late April to July 2010 and a 20% correction from early May to early October of 2011. In both cases, worries about Greece and Europe helped drive stocks down, and last year, the debt limit fiasco and Standard & Poor’s downgrading of the US’s credit rating to AA+ from AAA took their toll.
But in neither case did stocks enter a bear market; in fact, they eventually moved much higher.
NEXT PAGE: What the VIX Is Telling Us