Stock Market Action Reflects Investor Fears Not Only About Fiscal Cliff But Also About The Deficit, Showing Skepticism That A Compromise Can Be Reached In Time

Monday, November 19, 2012 08:14
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Stock Market Action Reflects Investor Fears Not Only About Fiscal Cliff But Also About The Deficit, Showing Skepticism That A Compromise Can Be Reached In Time

Tags: deficit | investing | stocks

Increasing fears across the globe of what will happen to the US economy if it slips over the fiscal cliff hit markets hard last week.
 
The Congressional Budget Office (CBO)warned that the US would be thrown back into recession and see spiking unemployment if nothing is done.
 
Money managers say investors are freaking out.

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The increasingly partisan divide among lawmakers and between lawmakers and the White House is making them skeptical that a deal will be reached in time or soon enough to avert psychological damage similar to the failure of Congress to approve a new budget ceiling in 2011.
 
Markets have tumbled as they begin to realize the fiscal realities since the financial crisis of 2008.
 
The rally that has more than doubled stock values on the Dow Jones Industrial Average since it bottomed at 6547 in 2009 was largely the result of borrowing by the US government to the tune of $4.7 trillion.
 
There has also been unprecedented intervention in the bond markets by the US Federal Reserve as it injected capital into the markets to prevent a financial disaster.
 
If severe actions—signified by the fiscal cliff—are taken to reconcile that debt with the economic realities, it would kick away a significant prop to the economy and likely result in another fiscal danger.
 
So, although investors fear what may occur if the US economy slips over the fiscal cliff, they also fear what will happen if the current track of deficit spending continues.
 
Analysts say those fears are already reflected in bond prices but not in equity prices, which are off only 10% from their recent highs.
 
The biggest problem is the uncertainty of not knowing how these issues will be resolved. The equity markets hate uncertainty so the downdraft in stock prices may not be alleviated until, at least, a plan for dealing with these issues is announced.
 

Markets did rally a bit Friday afternoon after a willingness to compromise seemed to be the result of the meeting between the White House and the top four Congressional Leaders on November 16.

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