Although the week started off on a positive note with the President announcing a potential deal on extending the Bush tax cuts, by the end of the week investors grew a bit more cautious. All eyes were on the politicians in Washington. As the spotlight falls on this lame-duck congress, our elected officials are wringing as much publicity as possible from this opportunity before seriously negotiating this tax extension.
On Thursday, it was the Democrats’ turn to huff and puff about the deal their president cut with Republicans to prevent a huge tax hike on all Americans on January 1. Democratic congressmen claimed that extending the cuts for the wealthy were against their ideals, as if wealthy taxpayers were somehow no longer Americans. But we are told not to fear since just about every forecaster in the country believes that despite this political grandstanding, a bill to extend the tax cuts will pass by Christmas. I certainly hope that will happen but I can’t help feeling a disturbing sense of déjà vu around the issue.
Do you remember the congressional antics during the $700 billion financial bail out plan when it was first brought up for a vote in September, 2008? Preceding that vote, most pundits on Wall Street couldn’t imagine it would fail to pass. After all, the financial system was disintegrating, world stock markets were melting down and no one out there had any other plan to stop the world’s descent into financial oblivion. Yet, congress failed to pass the measure. The Dow plunged 7% that day and continued to fall until those dimwits in Washington finally realized that regardless of their ideals, it was a bailout or the end of line for all of us.
The point is that we better get a bill passed by the end of next week or we could see a quick 50-75 point sell-off in the S&P 500 Index with corresponding drops in the other indexes.
There has been a spate of good news this week from a surprise drop in the U.S. trade deficit to continued improvement in the initial jobless claims and yet the markets have responded half-heartedly to this good news. Instead, they are hanging on every word that the politicians utter.
Meanwhile, over in the bond market, interest rates on intermediate and long-term U.S. Treasury bonds are beginning to rise. That has also contributed to the market’s worries. I have written on several occasions that we were in the ninth inning of this bull market in bonds and if you are not already out of those instruments you should really consider doing so and now. This rise in rates is also attracting new interest in the dollar, which is bearish for commodities, but it is a bullish sign that the economy is growing. As a result, increasing numbers of investors are gravitating toward the stock markets.
It is no surprise that most of the brokers on Wall Street are ratcheting up their forecasts for the S&P 500 for next year. This week most strategists have raised their target to the 1,425-1,450 level. That would be a whopping 20% increase from today’s levels. I have no problem with those forecasts because I believe they are entirely doable.
What may change are the sectors and types of stocks that lead the markets during the coming year. Large cap stocks, for example, have lagged the market since this rally began in March, 2009. There are some early signs that investors may be rotating into this space. Will commodities continue to outperform? I don’t think so, at least over the next few months.
Silver, gold, oil and other commodities are closing in on my price targets (see my column “Hi Yo Silver”). They are due for a healthy (and long overdue) consolidation, possibly on the back of a rising dollar.
In any case, the markets are going higher with or without a sudden, Washington-inspired dip. For long term investors, that’s all you need to know.