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This is normally the time of year when the stock market has its strongest seasonal upside move as the end of tax loss selling and optimism about the next year pushes stocks higher in the mid-November to mid-February level more than any other 3-month period in the year. But confidence in this seasonal move is fading quickly as investors start to realize that the politicians in the U.S. need to put partisan positioning aside for a while and come together with a new tax and spending package to replace the ‘fiscal cliff’ that will otherwise occur on December 31st as the Bush tax cuts expire and a series of automatic spending cuts are enacted. The impact to the U.S. economy of these measures is the equivalent of cutting US$600 billion from annual output, a substantial hit just as the world’s largest economy is just starting to show some sustained growth. Listening to the ‘posturing’ by the senior politicians of both the Democratic and Republican parties is giving investors very little comfort that these folks are actually intent on getting an agreement in place before the end of the year. So while the traditional ‘Santa Claus rally’ looked to be getting started two weeks ago, the political wrangling that we have witnessed since then looks like it could snuff out the traditional ‘holiday cheer’ that stock markets have given at this time of year.
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