This column originally appeared on Real Money Pro at 8:35 a.m. EST on Nov. 5.NEW YORK ( Real Money) -- I have been concerned that the economic, fiscal, geopolitical and earnings cliffs would be in attendance over the balance of the year and into early 2013, serving to weigh down the U.S. stock market. I still remain deeply concerned about the earnings cliff, but recent signposts suggest a somewhat more reduced concern over the economic, geopolitical and fiscal cliffs is in order. These signals, combined with central bank easing around the world, suggest that the rationale behind a meaningful market downside has been removed and that the market's risk/reward has improved. The S&P 500 closed at 1415 on Friday, which is precisely my fair market value calculation -- with the exception of my increased fair market value to 1485 in May, my methodology has been reasonably accurate this year. Reflecting the increased likelihood that my base-case election result will occur on Tuesday, with the Democrats easily retaining the presidency and (less easily) the control of the Senate, I see the downside to the S&P 500 over the remainder of the year limited to about 1390-1400. The upside to the S&P 500 should be 1450-1470. (See Scenario No. 1 in " More on the Business of Politics" below.) In other words, year-end risk is about 20 S&P points, and reward is approximately 45 S&P points, for a better than 2-1 reward over risk.
The Global Economic Cliff Is DisappearingWhile I am still in the camp that expects subpar global growth, recent indications are that a self-sustaining economic recovery is in place and that the recessionistas are dead wrong. Indeed, among the developed countries, the U.S. is shining: U.S. economy: High-frequency economic releases during the past four weeks suggest a slight reacceleration in domestic growth that should continue into 2013 -- of course, this is dependent upon how meaningfully and quickly the fiscal cliff is addressed. The positives are accumulating:
- Jobless claims are declining, and jobs growth is accelerating. October payrolls increased to a net 171,000 jobs (compared to an estimate of only 125,000), private sector hirings were the most since February (helped by an unexpected increase in manufacturing hiring), and the previous two months' hirings were revised much higher.
- Both the manufacturing and service sector PMIs have risen to above 50.
- Housing has clearly bottomed and is recovering in price and in activity -- arguably, the U.S. residential real estate market is embarking on a multiyear and durable recovery.
- The domestic automobile market is exhibiting a stronger recovery than many anticipated, and the 10.5-year age of the cars on the road suggests still-large pent-up demand.
- Retail sales are humming. October consumer confidence rose to 72.2, up from 68.4 in September -- the best since February 2008.
- Hurricane Sandy was just a terrible tragedy for many, but the rebuilding effort will result in incremental growth in the first half of 2013.
- Inflation and inflationary expectations are stable.
- Short-term interest rates are anchored and zero (though, as I will comment on later in today's opener, longer-term interest rates are likely to rise).
A Reasonable Fiscal Cliff CompromiseScenario No. 1:
A relatively comfortable Electoral College win by Obama in which the Democrats keep control of the Senate -- 40% probability (baseline expectation): The fiscal drag is about 1%-1.5%, and 2013 real GDP growth is 1%-2%. Republicans briefly oppose Democratic policy but quickly acquiesce to Democrat policy initiatives. Stocks are range-bound and have limited downside (S&P 500 1390-1400) and limited upside (S&P 500 1450-1470) over the balance of the year. -- Doug Kass, " More on the Business of Politics"The zeitgeist, expressed in Frank Bruni's editorial in The New York Times over the weekend (and elsewhere), is that the embittered and losing party will claim that their candidate didn't get a fair shake and will hunker down to fight and foil the victor. It is generally assumed by most that political dysfunction, in a country being steadily diminished by it, will ensue as the fiscal cliff approaches in January, 2013, but, as most recognize, a continued and partisan alternative doesn't get us any closer to solving problems that grow it bigger and bigger with time. Dismissed by many as an out-of-character response in addressing the fiscal cliff is a potentially more optimistic scenario expressed in the writings of Bruni:
There's an opportunity here, as we hit the reset button, for Obama to begin a second term by lavishing his attention on areas of general bipartisan agreement or for Romney to begin a first term with a focus on that same territory. It exists. Both parties acknowledge the need for tax reform and agree that we have to figure out a way to keep the spending on Social Security, Medicare and Medicaid in check, especially as the population ages. Both parties accept that a competitive America is an educated America, and would like to see the country make strides on that front.So before we surrender to our worst fears about Tuesday's winner or re-litigate our complaints -- many warranted, some overblown -- against him, shouldn't we first adopt a posture of support and see if he steps forward as a consensus-building problem solver rather than a hostage to special interests and partisan passions? Don't we owe that to him, and even more to ourselves? -- Frank Bruni, "The Far Side of Acrimony," The New York Times (Nov. 3, 2012)As I discussed in Friday's opener, I am increasingly confident that Obama will retain the presidency by a comfortable margin and that the Democrats will keep control of the Senate. The size of the Democratic mandate could serve as a framework result for a less contentious and acrimonious debate over the fiscal cliff (just as a large Romney win would also accomplish).