Well, the market has spoken. Yesterday afternoon, when US futures rallied from down 1.1 per cent to only 0.4 per cent lower the reaction looked reasonably positive. Well that was quickly thrown out the window as volatility spiked and everyone ran for the exit doors as the election picture became clearer, with very little change to the balance of power, if any at all.
Unsurprisingly, it was all about the fiscal cliff and how it’s going to be very difficult to come up with a solution before the automatic spending cuts kick in and Bush era tax cuts expire on January 1. As always, it was an ‘act first, ask questions later’ response from Wall Street as the major indices plunged the most since June 2012.
The political grandstanding and brinkmanship of 18 months ago, when Washington only just managed to come up with a solution to the debt ceiling is fresh in people’s minds. Markets just can’t see how, with the same balance of power it’s going to be different this time.
Yet it has to be. The consequences of letting the economy go off the cliff are simply too high, and I don’t think it will ultimately happen. Yet until there is a plan and clear path, with some signs of a willingness to compromise from both parties, markets are going to react as if we’re going over the edge.
Markets always over react, to the upside and downside and it looks like this market is going to price in the worst case scenario first. The market is a leading indicator so will price in the worst case scenario very quickly and then sit back and look for signs that there may actually be a solution. As we’re seeing, it certainly won’t wait for January 1 before it gets spooked.
Yet, I still think the fiscal cliff is the unlikelier of the two options. President Obama no longer has to worry about being re-elected, which should change things dramatically. Greater than ever, I think he knows that both parties need to work together on this for the greater good of the nation.
And amongst all the red on Wall Street, there were some positive signs. House speaker John Boehner offered the first olive branch, indicating the Republicans were willing "to make good on a balanced approach " that would include spending cuts and address government social benefit programs.
Whilst there’s no doubt that this volatility will continue in the short term, with probably more falls to come, it will certainly bring some opportunities. Markets can very easily swing from an ‘armageddon’ type situation to one that suddenly looks a whole lot better. Sit tight, it’s going to be an interesting ride.