Hi-Ho… Hi-Ho… Over The Cliff We Go…

| December 28, 2012 | 0 Comments

Guess what…

Washington politicians are taking their sweet time finding a Fiscal Cliff compromise.

What?

That doesn’t surprise you?

… me either.

Weeks of partisanship bickering has Congress coming down to the wire.  And now, with only a few days left to avert the cliff, investors are clearly getting worried.

In fact, once investors realized a deal wouldn’t be reached by Christmas, they started hitting the sell button.  And now that 2013 is only a few days away, they’re pounding on it even more.

Take a look….

S&P 500 Large Cap Index

As you can see, markets aren’t taking kindly to the fact that the Fiscal Cliff debate has taken a turn for the worse.  The S&P 500 is down 2.5% since December 21st, when it was apparent a deal wouldn’t be reached before Santa Clause made his annual trip.

And what will happen if a deal isn’t reached by January 1st?

I wouldn’t be surprised to see the S&P 500 retest the low set in mid November- 1,350 (red line).  And the longer we go into the 2013 without a deal, the lower the markets will go.

However…

There’s a silver lining to all this year-end doom and gloom.

The potential Fiscal Cliff sell-off will create a fantastic long-term buying opportunity. 

As a matter of fact, once Congress finally puts the Fiscal Cliff debate to bed, 2013 is shaping up to be a very good year for the stock market.

Why?

First of all, Ben Bernanke and the Fed will keep interest rates in the cellar for another year.  What’s more, the Fed’s third round of quantitative easing will likely continue through 2013 as well.

Both these factors are supportive of higher stock prices since investors will be forced to put idle cash to work in the market.  If they don’t, they’ll lose purchasing power due to a falling US dollar.

And that’s not all…

Europe’s debt crisis, though still unsolved, has eased substantially in recent months.  As you may remember, Spanish and Italian bond yields shot into the stratosphere last summer as insolvency fears ran amok.

But over the past few months, bond yields have dropped substantially from the highs seen during the heat of the crisis.  That means confidence is returning to European debt markets.

That’s another very bullish factor to consider for stocks going into 2013.

Now, there’s always the possibility Europe’s debt crisis could flare up again next year.  But in my opinion, the risk of missing out on a major move higher in stocks is greater than enduring a debt crisis related sell-off that may never happen.

But wait, there’s more…

According to the CFA Institute’s annual Global market Sentiment Survey, 50% of financial professionals say stocks will outperform other investments in 2013.  That’s up from 41% who were bullish on the markets in 2012.

“So what” you say?

Well, with bullishness growing amongst Chartered Financial Analysts (CFAs), more of them will be putting money to work in risk assets in coming months- yet another bullish factor to consider.

And finally…

Recent US gross domestic product (GDP) readings came in much better than expected.  For the 3rd quarter of 2012, the Bureau of Economic Analysis reported economic growth of 3.1%.

That’s well above the Q3 consensus estimate for 2.7% growth as well the actual Q2 reading of 1.3%. Of course, accelerating US economic growth is good for stocks no matter how you slice it.

So what should you do amidst all this year-end Fiscal Cliff uncertainty?

Get your shopping list ready…

If Congress doesn’t get their act together (and soon), we’ll likely see a cascade of selling in coming weeks.  But once a deal is finally reached, stock indexes should recover their losses.

What’s more, they’ll likely shoot to new multi-year highs in 2013 due to the factors I just mentioned.

What stocks should you consider buying?

There’s a wealth of good opportunities out there.  But one industry I find particularly interesting right now is that of oilfield services.  This industry was hit hard in 2012 as natural gas drilling slowed and margins contracted for most companies.

But now, much of the negativity has been priced into oil services stocks.  Names like Baker Hughes (BHI), Schlumberger (SLB), and Halliburton (HAL) are attractively valued and primed for a rise in 2013.

See you next year,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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