We have a system that increasingly taxes work and subsidizes non-work. --Milton Friedman
Despite the media focus on the fiscal cliff, the stock market has been quite resilient. There was momentary weakness when the politicians attempted to manipulate the public with comments, but overall the attitude is that a deal will eventually be done and we shouldn't worry too much about the short-term drama.
Unfortunately, we are going to have to deal with the constant media focus on this issue for at least a few more weeks. President Obama is scheduled to speak at noon today about the "impact of the fiscal cliff on the middle class," which is probably going to produce some sort of market reaction. It might not last long, but it adds uncertainty to trades when something said could result in a big reaction.
Besides the fiscal cliff, there is a mixed bag of fundamentals. Europe has saved Greece again but unemployment there is hitting new highs and the economy in China is sputtering also. Yum! (YUM), in its earnings report, just confirmed slowness in China.
In the U.S., the economic data have been mixed but much of the blame goes to Hurricane Sandy, and with everyone preoccupied with the fiscal cliff, it hasn't mattered much. Unfortunately, even if the fiscal cliff is out of the way, there will still be plenty of economic headwinds to contend with and it is not going to be smooth sailing.
One thing that's helping is positive seasonality. The period into the end of the year is typically strong, but we have a couple of issues. More money managers than usual are lagging benchmarks this year. The straight-up move to start the year caught many by surprise and they have never been able to catch up. They will be trying to rack up performance before year's end, and that usually means chasing big-cap names.
On the other hand, everyone knows that tax rates are going to rise substantially next year and I've heard many advisors suggest that it may be a good idea to sell stocks this year and rebuy them next year. Not only is a higher capital gains tax likely, but we will also be hit by the increase in rates in the Obamacare package.
Typically, market players will look to delay locking in gains until the new year but this year we have just the opposite, and that may become even worse as the fiscal cliff is negotiated. If you are sitting on a big gain in a stock like Apple (AAPL), it may benefit you to sell it before the new year, pay your reduced taxes this year, and then rebuy it in 2013.
If that sort of tax planning gains traction, it is going to be very tricky in the last few weeks of 2012.
We are hostages of the fiscal cliff, and that means we have to stay focused on short-term trades. There isn't much to do but knock out a few fast flips and wait for the government to get out of the way.
I'll be focusing on individual stock-picking and I will try to ignore the fiscal cliff as much as possible, but there are likely to be some landmines before this issue is finally put to bed.
We have a mild positive start this morning and not much emotion, but with President Obama speaking again later today, traders will try to anticipate a reaction.