What the Fiscal Cliff Means for Investors

09/17/2012 10:30 am EST

Focus: MARKETS

Steven Hochberg

Chief Market Analyst, Elliott Wave International

This election season, one of the biggest issues out there is "the fiscal cliff." Here's the scoop on what it means and how it will affect us, according to Steven Hochberg.

It is an election year and a lot of investors are understandably worried about the fiscal cliff that is looming. Today our guest is Steve Hochberg. Steve, why should investors be concerned?

Well, we do have an election coming up, and it is very interesting. One of the things we do at Elliott Wave International, we have an associate firm called the Socioeconomic Institute. The president of that firm is Bob Proctor, who I work with at Elliott Wave International. They have recently published a paper on elections, and basically the paper deals with how to predict them.

Socioeconomically, we are always looking at mood that determines action, so we are looking at the mood of the country to help try to determine the election outcomes. They went back and studied all the elections from the beginning of the country to now, and what they found was the best predictor of the election results is the stock market, because the stock market is really a manifestation of social mood, and the rate of change of stocks leading up to the election over the previous three years is a good predictor of who will win the election. So they have got a lot of play with this.

We are coming up to the big election, the market has been up right now over the prior three years, which tends to favor the incumbent, President Obama, but there is a lot of time between now as we are talking and November when the election comes, so we will see what happens in terms of the market.

But if you are interested in the market at all, keep an eye on the stock market, because it will give you a pretty good opportunity to maybe predict who will be the winner coming up.

That is interesting, because there has been a lot of talk recently about retail investors having gotten out of the market, so a lot of the trade presumably is the institutions. I just wonder, would they have the same sentiment as the retail investor?

Absolutely, and that is a great question. People are people, whether they are institutional people or whether they are retail people. A retail investor has really been leaving the market since about 2004; they are just not interested actually what happened in the real estate debacle and then the stock market of 2007-2009.

But institutions are no smarter than retail investors; people are people and institutions move en masse just like retail investors do, so it is still a good indication of who might win the election come this fall.

Now, I mentioned up front the big event that everybody is looking at right now-this fiscal cliff. How do you think that might make an impact on the markets and perhaps even in the election?

Well, we are kind of radical in our thinking. I don't think the fiscal cliff or any outside event is going to determine the market's trend.

When you have a Fed announcement, you can get a short-term pop or a short-term decline based on a motion. But what really moves a market's trends are social mood and crowd psychology. The trends are indigenous, so they are all self-perpetuating internally.

So I don't think the fiscal cliff is going to have any effect on the market whatsoever, good or bad. Now what is going to happen with it, it is really anybody's guess at this point.

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