Last Tuesday, improvements were announced in consumer
confidence, housing prices and orders for equipment and machinery.
Coupled with early reports of strong holiday shopping figures, this
is the kind of news that would normally send stocks soaring.
Instead, the Dow Jones Industrial Average lost 89 points.
Simply enough, the shadow of the
is looming over everything. There have been no signs of progress on
a budget deal, and when it comes to trying to beat an impending
deadline, no news is bad news.
What the fiscal cliff means to the markets
There are two observations to make about the way the financial
markets are acting against the backdrop of this drama:
The stock market is holding the government's feet to the
Investors know that if the fiscal cliff measures of higher taxes
and steep spending cuts go into effect, economic conditions will
be sharply different come January. That's why the market shrugged
off the apparent good news on consumer confidence, housing and
orders for equipment and machinery. Without a budget deal, all
those indicators could very quickly turn sour in the months to
come. Markets are not always rational, but they do tend to
anticipate events. Right now the message is that they won't be
mollified by anything short of a credible budget solution.
Things are much calmer on the bond side of
Meanwhile, things are much calmer in the bond market. Yields on
U.S. government bonds have drifted slightly lower during
November, which means prices are up a bit. The bond market, you
see, has less to fear from the fiscal cliff. Deficit-reducing
measures, however drastic, would improve the reliability of
government bonds. If the economy is brought to a standstill, it
would probably choke off inflation, which is also good for bonds.
What message can consumers take from this? Well, the bond market
is signalling that going over the fiscal cliff would probably
mean rates on savings accounts and money market accounts would
remain near zero. Mortgage rates could actually move a little
current mortgage rates
are probably close to as low as they can go. The rub for
potential mortgage customers would be that a weakened economy
would likely mean very tight lending standards.
There are times when the stock market can just seem contrary --
good news is treated as bad news or vice versa. This is generally
because of expectations, meaning the market has either
over-anticipated an announcement or is hoping conditions will
prompt a reaction from a government agency, such as
With regard to the fiscal cliff, though, the market seems to be
playing it straight. It's not that it is acting contrary toward
other economic news -- it is just ignoring it. The question is, can
Washington ignore a distressed stock market?