Stocks are bouncing this week in response to fears that Congress and the White House are dancing with danger on the edge of the fiscal cliff. I’m not sure what the tune is but I suspect it is a country-western number that rhymes “heartbreak” with “tax break.”
It’s always something in the markets, isn’t it? Last year around this time we were hanging on every word of every two-bit politician in Europe on the eurozone fiscal crisis.
Other times it has been monetary easing plans. Or earnings season. Or a botched product release from Apple (NASDAQ:AAPL). You get the picture.
And yet in every case — every single case, bar none — the crisis du jour has worked out in favor of the capital class, and stocks have ended higher. This year feels pretty shaky due to the high level of day-to-day volatility, but still, hey, the S&P 500 is still up nearly 11% YTD plus dividends, which is nothing to sneeze at.
And it’s not happening with a bunch of overblown, super-expensive tech stocks like Apple or Amazon (NASDAQ:AMZN) but with the likes of low-key Whirlpool (NYSE:WHR), the big appliance maker. The company is killing it this year both with a windfall from post-Superstorm Sandy sales and sales to new homeowners.
Indeed when you look at the stocks that have rallied since July 16, you see an amazing uniformity. If anything, big caps are doing slightly better than mid-caps and small-caps; non-dividend payers have beaten dividend payers; and companies with more foreign sales (like consumer staples makers) have beaten companies with mostly domestic sales (like utilities and smaller retail chains).
So if there’s such uniformity, what was with the bizarre but delightful turnaround on Wednesday, when stocks fell 1% in the first hour of trading and then turned around and rose 1.7% to close with a .7 gain? Well Bespoke Investment Group analysts studied that pattern and discovered it has only happened nine other times since 2009. And in all but one cases the market was much higher a month later, and six months later.
How could the market move higher despite all the uncertainty over the fiscal cliff? Well stepping back from the politics for a moment, J.P. Morgan analysts made a great point in a research piece. They point out that this remains a “multiple market” since the top-down estimate for S&P 500 earnings next year has not changed a whole lot lately (still $107), so the question then is what multiple will investors apply against that number. In other words, how certain will investors feel that the $107 will be achieved. The multiple is thus a reflection of macro sentiment.
Back in September, the JPM analysts argue, people were comfortable using 14x or higher (which means 1500+ for the S&P 500 Index) and in mid-November (in the aftermath of the election) that number moved down to 12x-13x as fears rose (which means an index at around 1300). If the cliff gets resolved, which is the consensus view, then the 14x number comes back into play.
So let’s say the cliff is rseolved. My guess is that an compromise is likely to have a negative effect on 2013 GDP since it will involve either higher taxes or lower spending or both.
But that’s not the issue. The issue is whether that outcome has already been discounted into stock prices here at the 1400 level.
I suspect that the deal will most likely depend more on higher revenue than lower spending, which in a twisted way could favor the markets. Why? Wealthy people will always find ways to make more money and avoid the higher taxes, so don’t worry about them. The markets will care more that government is going to spend incrementally more, and that means more sales for the likes of defense contractors, drug makers, health insurers, software vendors and the like.
Bottom line, expect more jumpiness in the next month but with a modest positive bias.
Jon Markman writes a daily swing trading newsletter, Trader’s Advantage. He uses a combination of fundamental and technical analysis to identify which stocks will move quickly.