There was an interesting article in The New York Times that really caught my attention. Simply put, it states that business owners are holding back from hiring and canceling new investments as they begin to consider the possibility of the much-dreaded “fiscal cliff” that could be up ahead. According to The Times, a rising number of manufacturers are putting their businesses on hold for fear that paralysis in Washington will cause billions in tax increases and severe budget cuts to kick in come January.
If it were to happen, there’s no doubt the fiscal cliff would have a serious impact on the economy. The Congressional Budget Office has said the economy could shrink by 1.3% in the first half of 2013 as direct result.
At this point, I’m not that worried about the fiscal cliff. Yes, politics is messy, and a lot of uncertainty lies ahead with the elections coming up. But the stakes are so big that I believe the President and Congress — probably after the election — will find a way to work together to come up with a less draconian plan that fosters growth and reduces the debt.
But the sooner they do that the better, precisely because of what this article said. Just the threat of a fiscal cliff could hurt the economy because of the domino effect of companies sitting on their hands — putting off hiring, laying off their workforces, delaying projects and refraining from mergers and acquisitions — all due to fears of budget cuts and tax increases come January 1.
Better in the Short Term
It’s all part of an interesting environment right now. If the economic data continues to worsen and political posturing persists, then we may see the Fed take action to inject stimulus through a third round of quantitative easing, which is pretty much always good for stocks. But, if the data improves, M&A activity picks up, and lawmakers do reach a budget agreement, then we could still solid improvement in stocks, the economy, and everything in between.
I would characterize it as a stock picker’s market, which I like because there is still money to be made in solid investments. As we head into the final third of the year, I’m eyeing stocks with potential for solid earnings growth that should continue to outperform in the current market conditions.
As I’ve discussed with you, I see some great opportunities small-cap stocks, and I’m looking for M&A activity to accelerate in the final quarter of the year. I’ll also be keeping a close eye on the Fed’s Jackson Hole Symposium in September, where we may hear more about economic stimulus measures. Until then, however, I do expect a rather quiet market in August as investors watch and wait for developments both here and abroad.
I’ll be on top of these developments when they happen and the investment opportunities that they present. In the meantime, you can read this New York Times article here.