Stock Market Update 09 Dec 2012

Wait.

The markets have been held hostage by the ongoing political drama over the "fiscal cliff" discussions in the U.S. the past week.  As such, while other world markets ex-U.S. have done reasonably over the past several weeks, during the last week the U.S. markets have been stuck in a zone which could go either way over the short term (depending upon upcoming events the next 2 weeks).

Past Weeks Performance:

-Emerging Markets (EEM):  +2.39%

-Pacific ex-Japan (EPP): +1.51%

-Europe (IEV):  +0.76%

-Japan (EWJ):  +0.54%

-Total U.S. (VTI):  + 0.22%

As a consequence , "global" equity ETF's that represent the price movement of equity funds within the Provident Fund have lagged the past week due to the US. influence:

-iShares MSCI ACWI Index Fund (ACWI):  +0.81%

-Vanguard Total World Stock ETF (VT):  +0.76%

It is interesting that during the late summer-fall period it was the U.S. that was outperforming and the "rest of the world" being a drag on global equity funds; now it is the opposite.

In the U.S. indexes continue to be display outperformance by large cap stocks over small cap and technology stocks:

-Dow Jones Industrial Average:  + 0.99%

-S&P 500:  + 0.13%

-Russell 2000:  +0.04%

-Nasdaq 100:  -1.32%

It is generally accepted that during bullish market conditions the "riskier" assets such as small Cap (Russell 2000) and Technology (Nasdaq 100) should lead; the fact they are currently underperforming is cause for some concern.

Over the next 2 weeks there will be intense political tension in Washington over the fiscal cliff negotiations.  In addition, the next FOMC meeting is next week (Dec 11/12) and should provide some additional information on possible new contingent monetary programs they may have in the place should there be an impasse over the current fiscal negotiations and the combined tax increases and spending cuts begin to drag down the US. economy.

It is my belief should some reasonable compromise be reached (which I believe will happen though I am becoming less confident of that position due to the impasse the past week) combined with possible further FED action, the outcome would have the U.S. and the rest of the world moving ahead at a slow but steady pace into 2013.  This would be bullish for equities over the next 6 months.

Conversely, should the current negotiations break down it would be expected the markets could experience a fairly sharp and sudden decline.  Analysis I have read has suggested the effects of the fiscal cliff cuts and tax increases will remove 1.8% from GDP growth in 2013 (not the 4% widely reported).  If so, the U.S. GDP could still grow at just under 1% in 2013.  This is very close to recession levels and needs to be watched closely into 2013.


Bottom Line:

The U.S. markets are on a pivot and could go either way the next 2 weeks.  The rest of the world is doing moderately well (Europe stable the past few weeks, China appears to have turned the corner, Japan muddling upwards).

If the fiscal cliff gets sorted in a way that both parties are not happy with (but can live with), we may see a good recovery in the U.S. markets.  Alternately, should the automatic cuts come into play we should see a drop in U.S. markets as Mutual Fund companies and Hedge Funds sell winning positions to take advantage of the current capital gains tax still in place to the end of 2012.

My preference would be for the second outcome as I would really like to see a shakeout decline to add to my current positions.  Currently my model has a 65% weighting in Stocks, 30% in Bonds/Cash and 5% in Gold.  In my Provident Fund I am currently underweight equities at 50% and a nice drop in the markets over the next week or two would be a great Christmas present to be bought.

Until some clarity the best course of action remains to not change positions.

As of today I remain in a 50% Equity/50% USD Cash position as I indicated in my last post:

-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%

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