Seatbelts, please

While I still think that a compromise in fiscal cliff negotiations will be reached, the path to that agreement could be turbulent for the markets.  I see two main reasons for that.  First, year-end tax selling.  It is quite likely that capital gains taxes will be higher next year.  Therefore, it may make sense to sell some of the winning investments now, rather than in January or after.  A recent slide in Apple stock could have been caused, at least partially, by that.  This tax-gain selling, together with traditional tax-loss harvesting, could exert higher than normal selling pressure on the market in the last weeks of December.

The other reason is political.  Republicans in Congress have repeatedly stated their pledge not to raise taxes (or at least tax rates).  Ironically, the easiest way to accomplish that is to let the negotiations fail this year and have taxes increase automatically on January 1st.  Then, they will have remained true to their pledge; afterwards, it would be politically easier to negotiate for rate decrease, since both Republicans and Democrats agree that next year default tax rates are too high for majority of population.  Such political posturing will not be good for the markets.

So, if any of that comes to pass, we could be in for a bumpy ride for the next few weeks.  The silver lining here is that all of this is short term.  Just as debt ceiling negotiations were resolved in the summer of 2011, fiscal cliff will be resolved  since it is in everyone’s interest. However, possible volatility ahead may present us with some excellent buying opportunities.  Have some cash ready.