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Markets At Fiscal Cliff Mercy and Vice Versa!

  • Written by Syndicated Publisher No Comments Comments
    November 30, 2012

    It’s obvious that the near term health of global markets is dependent on the outcome of negotiations aimed at resolving the fiscal cliff before year end.

    But it also seems apparent that the political will in Washington to reach a compromise is being determined by concerns about controlling market reaction more than anything else.

    There was little concern about the fiscal cliff, no discussion of it at all during the political campaign. It was not until the stock market topped out in mid-September on cliff concerns that politicians began to pay attention.

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    That’s the way it’s been globally since the 2008 meltdown.

    The U.S. Fed only came to the rescue with QE stimulus programs in the summers of 2010 and last year after the market plunged on concerns the economy was slowing into recession. It only began to promise more in June this year after the market plunged 10% again on similar concerns.

    In Europe, emergency summit meetings and promises to solve the euro-zone debt crisis have only taken place after similar market plunges panicked officials.

    It’s been interesting since the fiscal cliff finally took center stage in Washington a couple of weeks ago, how statements and comments from both sides seemed to be aimed at testing the markets as to how far they dared go in hanging tough to their preferences.

    Three weeks ago the talk was tough, both sides sticking to their long-held agendas and demands, showing few signs of compromise. The Dow plunged another 3.9% in two weeks.

    Their comments quickly turned more conciliatory, both sides issuing statements that they were sure they could reach an agreement. The Dow surged up 3.3% last week.

    Were they just testing the markets again this weekend with remarks expressing disappointment that so little progress was being made, with criticisms that only low level staffers had been meeting?

    If so, they got their answer when the Dow plunged 131 points over Monday and Tuesday this week, and was down another 113 points in the first hour yesterday.

    Suddenly, Republican leader John Boehner met with reporters and expressed confidence that an agreement will be reached by year-end, and President Obama was instantly out with a statement saying he thinks an agreement can be reached before Christmas.

    The market  reversed on a dime, from the Dow being down another 113 points to being up 106 points by the close.

    They certainly have markets dancing on their puppet strings.

    But it’s a dangerous game if they get it into their heads that they can control markets so easily with words and promises, so can hang tough in the negotiations and keep the market confident with promises that any negative results if they let the economy go partway over the cliff are only temporary.

    I still believe they aren’t that dumb and will reach agreement. 

    To read my weekend newspaper column click here: Reasons to be Bullish – At Least For a While!

    Subscribers to Street Smart Report: There is an in-depth “Markets Signals and Recommendations’ update from last night in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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