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As fiscal cliff nears, market complacency sets in

Dec 11 2012, 02:55 IST
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SummaryTimothy Geithner said this past Wednesday that he was ready to let the economy go over the “fiscal cliff” if Republicans would not agree to higher tax rates on the rich.

Like many on Wall Street, investor Todd Petzel cringed when US treasury secretary Timothy Geithner said this past Wednesday that he was ready to let the economy go over the “fiscal cliff” if Republicans would not agree to higher tax rates on the rich.

“I didn’t think good things would come out of the comment,” said Petzel, the chief investment officer at Offit Capital Advisors in New York. “But nothing happened.”

The rhetoric heated up again on Friday, when Republican House Speaker John Boehner accused US President Barack Obama of “slow-walking” the economy to the edge of the cliff. Again, markets brushed it off and showed very little reaction.

Investors’ collective shrug marks a stark change from how they had behaved in the two weeks after the presidential election, when nearly every utterance from a politician about the looming budget crisis caused wild swings in stock prices.

The S&P 500 index has nearly retraced the 5.3% slide it suffered in the first seven sessions after the November 6 vote. Some of the rebound reflects market confidence that Democrats and Republicans, despite their rhetoric, will eventually agree on at least a short-term deal to avoid the cliff - nearly $600 billion of tax increases and spending cuts set to take effect in January that could bring on a new recession.

It also could be that investors have peered over the cliff and realised they are looking at a gentle slope instead. “The sentiment has definitely changed,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York. “The market has become somewhat desensitised to headlines out of Washington because the fear of the economy hitting a wall in 2013 if we don’t get a deal done has diminished.”

While the S&P 500 was on track to end the first week of December nearly flat, performance throughout November was far more volatile, with the index lurching from a loss of more than 2% one week to a gain of more than 3% the next. The benchmark ended the month 0.3% higher.

“Seasoned investors know that waiting on the sidelines for clarity about fiscal negotiations is not an option,” Carmine Grigoli, chief investment strategist at Mizuho Securities, wrote this week in a note to clients.

“In our view, the worst case outcomes are likely to be avoided and the stock market should rise by 5% to 7%once the risk of fiscal Armageddon is behind

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