On Thursday, the major U.S. stock indices fell for the second
day in a row with the S&P 500 moving below its 200-day moving
average. However, even pessimistic analysts do not believe that
the market fall will resemble a falling knife from here on, as it
encounters pretty strong support at these levels.
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The primary concern for investors remains the 'fiscal cliff'.
Under the worst case scenario of gridlock in Washington, D.C.,
some $600 billion in tax hikes and expenditure cuts will go into
effect in early 2013. Under these circumstances a feeble U.S.
economy would go once again into recession. Investors are
concerned about possible increases in dividend and capital gains
A more plausible solution would be that Washington may reach a
stop-gap solution. In this context, the International Monetary
Fund (IMF) urged the U.S. government to quickly reach a composite
solution rather than adopt a temporary fix. However, the IMF
believes that a cliff remains a 'medium-term' possibility, which
would cause significant harm to the economy.
Standard & Poor's Rating Services, a part of
The McGraw-Hill Companies
, Inc. (
), believes that despite a 15% probability of a fiscal cliff, the
most likely situation is a timely compromise by the
Administration, which would help avoid most of the negative
consequences of a cliff.
Other analysts pointed to myriad factors which may be raising
investor worry. The mountain of government debt in the U.S. is a
cause of concern with the IMF calling for a credible debt
reduction plan. The debt ceiling needs to be raised in order to
avoid a temporary shut down of the federal government. Then, ECB
President Mario Draghi stated that the German economy is being
pulled down by a moribund Europe. The German economy has shown
signs of weakening of late with a falling trend in exports. Also,
in Greece, a weak coalition passed an austerity plan.
We believe that pharmaceutical and consumer staple companies,
Johnson & Johnson
Bristol-Myers Squibb Company
Procter & Gamble Co.
) may be able to better withstand different economic conditions.
Investors may consider these to be relative safe