As we prepare to ring in the New Year, all eyes are focused on the edge of the “Fiscal Cliff” as if the outcome of this single event will set the course for 2013 and beyond.
Granted, if our fearless leaders choose to do a full gainer off the edge of the cliff and fail to pull the ripcord in time, we will all plunge to our fiscal death.
But the markets are acting as if this scenario is unlikely. Although we have certainly seen increased volatility in the past couple of days, the market hasn’t broken its upward trend from its low on November 16. So until the final chapter of the Fiscal Cliff is written, the market will remain spellbound to the drama and react accordingly.
But what happens after the cliff is conquered? What is the risk assessment? In the short term I would expect a celebration rally. But barring a new Washingtonian or European inspired docudrama; the market will eventually begin to take a sobering look at the economic facts.
The “Economic Cycle Research Institute” declared in September that the U.S. had entered a new recession in July, yet the market was too busy betting on the election to notice. Will an official recession materialize? Only time will tell.