We think the risks of a 2013 recession are low - the fiscal cliff is turning out to be more of a slope, with congress splitting up the issues of spending and taxes and finally agreeing to permanently keep most taxes from rising. The S&P responded, justifiably in our view, to this political détente with a 2.8% gain last week to 1466, just above last September's closing high and the highest in four years. We see technical support around 1400, with upside potential to 1550. Equally, we are not surprised by last week's upside breakout in bond yields (see Weekly Chart). While Washington's progress so far is consistent with The Weekly View's 'muddling through' baseline case for 1.6% GDP growth (see Outlook 2013: Emerging from Policy Purgatory), it offers little hope of anything better, in our view.
David Fuller's view This issue goes on to report some modest
improvements in US economic data over the last month to support their hypothesis.
They may be right and I hope they are. However, the Obama administration's primary
goal, in my opinion, is wealth redistribution in favour of their largely state-supported
constituency. This includes considerable increases in welfare benefits for over
half of the population.
Morally, this may appear to be justified, depending on one's perspective. However, there appears to be little awareness or concern by the White House over how this will be funded. Consequently, US government's debts are very likely to surge once again over the next four years. Presumably, this is someone else's problem in President Obama's view, or he may think that the enterprising US economy will get lucky, as it did with shale gas and oil, ironically opposed by President Obama and most of the Democrat politicians who favoured considerably more expensive and less efficient green energy.
The problem, as I see it, is that redistributive policies have been very effective in terms of slowing GDP growth to below its long-term averages, fostering an entitlement mentality, reducing the incentive to work, and driving away entrepreneurs and businesses due to social costs which increase overheads, while reducing profits and reinvestment in plant and personnel.
The Economist magazine certainly got it right with its latest cover and headline: "America turns European".
In terms of The Weekly View's comments on the S&P 500 Index (monthly & weekly), their mildly optimistic view will not being challenged while initial support near 1400 holds. However, I expect that level to be tested and many investors will understandably be cautious near the all-time highs, despite QE. The minimum expectation in this region is that a period of sideways trading is likely, even if the last two reaction lows near 1400 and particularly 1340 hold.
(See also yesterday's Comment.)