Fiscal CliffIn the aftermath of the election, what we were forced to witness in the markets was not the full pricing in of the fiscal cliff. That process, as I indicated in October, began following the September Fed meet-and-greet. So, assuming that Fed meeting was the starting line for when the market slammed down the valuation-reset button, what is left to be priced into stocks that could prevent a "buy-on-the-dip" approach?
- One factor may be worse fourth-quarter earnings growth vs. last year, as compared with that of the third quarter -- and results that are below shaved estimates. A whole bunch of low-quality quarters are forthcoming.
- Also probable are intra-quarter earnings warnings. This should occur as companies realize third-quarter stabilization in certain hard-hit European end markets was a head-fake, as suggested by Polo Ralph Lauren (RL). The U.S. fiscal cliff should only throws gas on the embers -- companies are likely to protect cash piles, order inventory cautiously and to refrain from chasing budding opportunities in Europe. All this perpetuates the economic stagnation.
- If left to fester, the fiscal cliff should render the third quarter a disappointing cycle peak. The fourth quarter rate, then, should emerge as chopped down to size -- growth of 1% to 1.5%. In the first quarter of 2013, growth should go negative.
- The holiday season should upend the optimistic projections of retailers. That, in turn, stands to impact first-half 2013 inventory planning and longer-term investments. The economic ramifications here are obvious.