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The Lindsey Report November 2012


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Lindsey Image 1Article by, Cleaton Lindsey

As suggested in last month’s letter, the markets did indeed overreact to the election’s outcome (as measured by the Dow, the S&P 500, the Nasdaq and likely any other domestic equity index).  Interestingly, some foreign equity markets followed a similar pattern, using the German Dax and China’s Hang Sang as the measuring stick for Europe and Asia, respectively.

In looking at charts for all these indexes, the pattern was similar.  Valuations rose in the days leading up to the election and then immediately, post-election, they all tumbled over the next five to seven days (the Dow, Nasdaq and S&P 500 all fell more than 5%).  However, since that time, they have all rebounded and are finishing the month basically where they started.

Although, the expiration of the Bush-era tax cuts and automatic Federal spending cuts (at year’s end) have been dubbed the “fiscal cliff”, a better term might have been “The Big Hill”.  Unfortunately, that terminology might not sell as many papers.

The reality is that even if we go over the “cliff”, it is not like the initial impact of increased income taxes and spending cuts will be instantaneous and dramatic.  These changes will take place over the course of the year.  Yes, income taxes will increase, but most people get paid throughout the year: not January 1st.  The same holds true for the spending cuts

Arguably, the longer we go without resolution, the greater the impact (like slowly going down a “Hill”) and if nothing has been done to resolve the problem six-to-nine months from now, the impact will likely be significant.  Fortunately, this means that even if it is left to the New Congress, they have time to address the “cliff” before the changes damage the economy.  Don’t get me wrong, Congress absolutely needs to resolve this problem: sooner rather than later.

Lastly, given how the markets reacted in the days post-election, it is reasonable to expect a more significant, negative reaction if we go over the “cliff”.  On the other hand, I would expect them to quickly recover once a resolution is reached.  I trust that one will be reached before long!

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