Market’s ADD Syndrome

In my previous post, I expressed an opinion that market could get some relief after uncertainty surrounding the election was removed.  Well, that did not happen.  Perhaps the traders didn’t like the fact that President Obama was reelected, but the more likely culprit for continued weakness was yet another uncertainty, this time related to approaching “fiscal cliff”.  Of course, it was well-known before the election, and so it looks like the markets have an ADD syndrome — they can only focus on one thing at a time.

Current worries about the fiscal cliff are very reminiscent of the debt ceiling debates in summer of  2011.  Then, a possibility of U.S. default, averted at the last-minute by partisan Congress, caused a more severe correction in the markets.  This proved to be a good buying opportunity: even after the recent pullback, S&P 500 is up 27% from the lows of last summer. Just like no one in the their right mind wanted U.S. to default back then, falling off the cliff is no one’s interest; some sort of compromise will be reached, and markets will reflect it — but we could be in for a bumpy ride while the talks are in progress.

The underlying fundamental and economic reports and U.S. and abroad have been fairly positive lately.  Consider:

• After declining slightly in Q3, company earnings are expected to rise 9% this quarter and 13% next year.
• Housing market continues its recovery.  Median home prices rose 11% compared to one year ago, and inventory of unsold homes continues to shrink.
• Black Friday and Cyber Monday sales were strong, setting up a possibility of a good Christmas shopping season.
• Consumer confidence index rose to its highest level since early 2008.
• After several quarters of slowing growth, Chinese economy started to accelerate again.
• It seems that the worst is over for the European debt crisis.  The yields on Spanish and Italian bonds are declining, making it easier for these nations to service their debts.  An agreement for Greece bailout was recently reached.

Given the bounce in the indexes in the last two weeks, markets are apparently starting to take notice.