With the last week of the year approaching and talks towards preventing the Fiscal Cliff back to the start. It is a wonder that Friday’s drop wasn’t seen more often this month. In fact the S&P was up almost a percent in the past week. With the $600 billion in spending cuts and tax increases days away how can so many in the markets be this relaxed? I think it is a condition where the outcome of not striking a deal so severe that investors prepare to be pleasantly surprised. The conditions that would face the US economy and the markets, if a deal is not reached, are so inconceivable and short term a strategy would be impossible to put together or out of date at a moments notice.
I believe that markets have room to grow but in the short term it is hard to determine if we will have another 20% drop in a matter of weeks or if the really is sustained. Bond yields are getting so low that they seem a death trap other than in the worst of conditions (conditions that warrant losing money in real terms at a steady, but predictable, clip). Fixed income will have to start seeing yields rise on order to stay competitive to equities; the absence of Fiscal cliff and Euro zone breakups threats, will see investors run to other risk assets as central banks around the world stoke inflation like never before.
I have liquidated the strategy for the year and will be posting the final write up after Christmas. I will also be looking to build the next strategy for the New Year and will try to start taking a more detailed, stock specific approach as well.