Market Looks Past Election To Fiscal Cliff

November 07, 2012

A worried market lets everyone know that the election is yesterday’s news.


The U.S. presidential election is over now, and whatever uncertainty the process engendered in markets bent on finding things to worry about has been replaced by new anxiety about whether the so-called fiscal cliff could derail the fragile economic recovery.

“In the markets, we always have to find something to worry about,” a hedge fund manager, who spoke to IndexUniverse on condition of anonymity, said. “And, as soon as the election was out of the way, it became a competition between Europe and the fiscal cliff, and we went right to the fiscal cliff.”

Indeed, a gold market that was revived in the past few days on views that President Obama’s re-election meant the Federal Reserve’s easy-money policies would continue took a backseat to concerns that the toxic environment in Washington, D.C., might mean that Congress won’t find a way to extend Bush and Obama tax cuts to help support near-term economic growth.

The Dow Jones industrial average slipped more than 300 points right off the bat, and ended more than 2.3 percent lower, while gold prices started marginally lower and traded in the red most of the day just to close marginally higher. Funds like the $75 billion SPDR Gold Shares (NYSEArca: GLD) traded lower most of the day. The Dow closed 312.95 points lower, and GLD ended the session 0.05 percent higher at $166.49 a share.

The selling was also about concerns that Greece may have more difficulty meeting its debt obligations, and came a day before a crucial meeting of eurozone leaders. If the past is any guide, the slow road out of a debt-induced crisis will continue, and probably in fits and starts, but that doesn’t mean investors aren’t going to worry along the way.

Some of Wednesday’s sharp move was also about the triggering of program-trading algorithms rather than an imminent possibility that the market could completely fall apart as it did in September 2008 when the U.S. House of Representatives first rejected the bailout package for banks.

There was a lot more leverage in the system then than now, so the potential for wholesale panic-selling is all but missing, even if Congress dithers before tackling the fiscal cliff.

“They’ll find a way to kick the can down the road. It won’t be perfect, but they’ll get something done,” the hedge fund manager said about the “fiscal cliff,” saying that while legislators may kick and scream along the way, they will address it in time and without a 2008-like draconian turn of events.

He also argued that despite gridlock in Washington, Democrats are now grasping that entitlements will have to be trimmed, and Republicans are becoming open to the idea that revenues have to go up in the form of higher taxes. That’s encouraging for the restoration of long-term U.S. fiscal health, he said.

Even so, there’s plenty of anxiety to go around.

But if markets and the economy dodge fiscal cliff and eurozone bullets, the question of how the market views another four years of the Obama administration comes back into sharper focus, and with it, so does a bit of anxiety.


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