Readers know I have been concerned about the market over-reacting this Fall to the rising uncertainty. The primary cause of this uncertainty is the impact of the Fed tapering its quantitative easing (QE3). We will know much more about it on Friday when the monthly "Jobs Report" is issued. If the economy created over 200 thousand new jobs last month, we can expect tapering to begin almost immediately. If less than 150 thousand, we have a few more months before they start. The important thing is that the stock market is already expecting it soon, which is depressing the market somewhat now but taking some future volatility out of the market when it happens.
The second cause of the uncertainty this Fall is the pending budget/debt ceiling debate. The scuttlebutt I've been hearing is that the budget battle will be delayed until next month, so that debate can be combined with the debt ceiling debate. But, the fix may be coming together, so that everybody can claim victory even though precious little is accomplished.
Look for a decrease in farm subsidies, increased fees for government services (imagine application fees for Social Security or filing fees charged by the IRS, if you don't file electronically), increased Medicare co-pays for high income (not high asset) taxpayers, and slower cost-of-living increases. This decreases the rate of growth for entitlement spending, plus it decreases subsidies for high-income taxpayers, which includes those receiving farm subsidies.
If all of that simply continues Federal spending at the current level, we will have stabilized the annual deficit at about 4% of GDP, compared to the 10% we experienced a few years ago during the global financial crisis. The elected children from the Republican Party can claim they prevented another tax increase on the "job-creators," despite allowing increased Medicare costs and decreased farm subsidies for them. The elected children from the Democratic Party can claim they took more money from "the rich" and also prevented cuts in monthly benefits of Social Security and other entitlements.
Although this will not happen until the last possible minute, it certainly does reduce uncertainty, which will help the stock market.
The third cause of uncertainty is Europe, of course. Now, it looks like Merkel will win re-election easily. Despite her hardliner talk during her campaign, it is believed she will be in a stronger position to re-fix Greece, as she has done twice before. Of course, Italy has become even more problematic, with the former president threatening to pull out of the ruling coalition. So, who knows . . .
So, while it is still too early to hear the fat lady sing, I am feeling more optimistic about the stock market's traditional ability to predict the future.
The second cause of the uncertainty this Fall is the pending budget/debt ceiling debate. The scuttlebutt I've been hearing is that the budget battle will be delayed until next month, so that debate can be combined with the debt ceiling debate. But, the fix may be coming together, so that everybody can claim victory even though precious little is accomplished.
Look for a decrease in farm subsidies, increased fees for government services (imagine application fees for Social Security or filing fees charged by the IRS, if you don't file electronically), increased Medicare co-pays for high income (not high asset) taxpayers, and slower cost-of-living increases. This decreases the rate of growth for entitlement spending, plus it decreases subsidies for high-income taxpayers, which includes those receiving farm subsidies.
If all of that simply continues Federal spending at the current level, we will have stabilized the annual deficit at about 4% of GDP, compared to the 10% we experienced a few years ago during the global financial crisis. The elected children from the Republican Party can claim they prevented another tax increase on the "job-creators," despite allowing increased Medicare costs and decreased farm subsidies for them. The elected children from the Democratic Party can claim they took more money from "the rich" and also prevented cuts in monthly benefits of Social Security and other entitlements.
Although this will not happen until the last possible minute, it certainly does reduce uncertainty, which will help the stock market.
The third cause of uncertainty is Europe, of course. Now, it looks like Merkel will win re-election easily. Despite her hardliner talk during her campaign, it is believed she will be in a stronger position to re-fix Greece, as she has done twice before. Of course, Italy has become even more problematic, with the former president threatening to pull out of the ruling coalition. So, who knows . . .
So, while it is still too early to hear the fat lady sing, I am feeling more optimistic about the stock market's traditional ability to predict the future.
