Go Over the Cliff? May Be Best Thing
To me it was a case of buy in anticipation, sell on the news. QE3 was announced on Sept. 13, and most stocks, ETFs and equity averages peaked between Sept. 14 and Sept. 21.
As the stock market began to become infected with "QE fatigue", the focus shifted to the pending "fiscal cliff". On Election Day stocks had a strong rally in anticipation that Mitt Romney would pull out a victory, but when President Obama won a second term stocks took it on the chin and "QE fatigue" became an epidemic. With this week's weakness and market concerns around the world this epidemic has become a pandemic.
All major equity averages and all sector ETFs I track have negative weekly chart profiles. Without any safe sectors the epidemic of "QE Fatigue" can be justifiably called a pandemic, as there are no safe havens in the equity markets.
The background to the "fiscal cliff" began with the Budget Control Act, which became law because of the partisan stalemate in Washington, DC. Democrats and Republicans could not agree on how to cut the budget deficit. This law calls for across-the-board spending cuts, "sequestration" to most discretionary programs. In addition, the law specifies the Bush-era tax cuts expire as 2013 begins.
President Obama wants the tax cuts to end for families making more than $250,000 per year, or $200,000 for individuals. The House Republicans do not want any tax rate hikes but seek to overhaul the entire tax code. If the Republicans agree to keep middle-class tax rates unchanged and raise those on the so-called wealthy, they lose their bargaining chip.
In my opinion, the Budget Control Act was the country's insurance policy that America would take action to reduce the uncontrollable budget deficit and growing debt. It's the act that forces austerity.
Between now and year-end there seems to be no chance of achieving a Grand Bargain, so let the "Fiscal Cliff" happen. The aftereffects should result in bringing together both sides of the aisle. By the time 2013 begins, stock market weakness could be factored in as stocks are already falling off their technical cliffs.
Stocks are now declining in anticipation that the "Fiscal Cliff" will happen. Investors are selling shares now to book profits to prevent the differential costs associated with increased taxes on capital gains and dividend income the potential in 2013. This should give the stock market a strong bid as 2013 begins as investors buy back those shares sold since mid-September.