While the fiscal cliff problem has absorbed almost all of the financial media comment since the election, there's a lot more to the stock market decline that has virtually gotten lost in the discussion. The market actually topped on September 14th and has trended down ever since. Most importantly, the U.S. economy was a lot weaker than the consensus believes before Hurricane Sandy became a factor. In addition Fed policy is becoming increasingly ineffectual, earnings forecasts are coming down, Europe is officially in recession and China, as well as the other BRIC nations, is slowing down.
Although nobody knows the outcome of the fiscal cliff situation, it is likely to be settled, if not before year-end, then in the first part of 2013. However, even if this happens, the solution will probably entail some combination of lower government spending and increased revenues----in other words, a tightening of fiscal policy. While a solution is surely better than a continuation of confrontation, a tightening of fiscal policy creates further headwinds for the economy in the shorter term. Moreover, an agreement on the fiscal cliff does not solve all of the other serious problems facing the economy and the market.
Most serious of these problems is the U.S. economy itself. Although it may be doing better than most other countries, that is damning it with faint praise. Specifically, the highly-touted consumer recovery, when examined closely, is built on quicksand. Yes, after lagging earlier in the year, real consumer expenditures has jumped by 0.9% over the last three months. However, during that period real disposable income actually declined by 0.2%.
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(Excerpt) Read more at businessinsider.com ...
