CURRENT ACCOUNT
November 19, 2012, 2:07 p.m. ET
Markets Still Fear a Steep Fall Off Cliff
By FRANCESCO GUERRERA
These days, Washington political gatherings resemble a tax accountants' convention. As the nation hurtles toward the "fiscal cliff," the capital's corridors of power echo with questions on corporate tax rates, balanced budgets and sequesters. (I heard them all mentioned repeatedly during the politics-heavy WSJ's CEO Council in Washington last week).
Outside the Beltway, the markets and the corporate world are watching, puzzled, worried and less than impressed.
The tussle over the "cliff"—a $500-billion combination of tax increases and spending cuts that will come into effect in January absent a bipartisan deal—is unsettling investors and spooking corporations right when the global economy needs the U.S. to do its part to drive growth and rebuild confidence.
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Associated Press
Before Democratic and Republican honchos disappear behind close doors to play "deal or no deal" until the wee hours of Dec. 31, they should consider the following: Investors, traders, bankers and executives won't like half-baked compromises, or cans kicked down the road.
The dozen or so chiefs of financial companies who attended the CEO Council identified the instability brought about by the cliff's negotiations as their paramount concern, trumping longtime favorites such as regulation and economic sluggishness.
As Stephen Schwarzman, the chairman and chief executive of the private equity group Blackstone Group LP BX +5.28% said, "What we concluded, pretty much across the board, is that driving off the fiscal cliff has unpredictable outcomes, few of which could be good. And that it's unclear how consumers, markets and other constituencies would react to that, which adds an additional dynamic to trying to get a deal done."
If that sounds obvious to you, then you aren't a Washington power broker. My sojourn in the capital provided some worrisome evidence that the two sides are fully prepared to engage in a game of political football right on the edge of the fiscal cliff.
There was the former member of President Obama's economic team who asked who would care if political stalemate caused a credit downgrade of the U.S. (Answer: a lot of investors), the politicians from both sides who talked of the need to strike "the right deal" rather than "any deal" and the Congressman who confidently predicted that markets "would understand" if a resolution were to be delayed by a week or two into 2013.
Despite Monday's rally, there are few signs of the markets' capacity for "understanding." Before Monday's gain of more than 207 points, the Dow Jones Industrial Average had dropped in six of the last eight sessions since the Nov. 6 presidential election put the cliff on the horizon.
Blue-chips aren't the only ones feeling the pinch. The technology-heavy Nasdaq Composite Index and the Russell 200 index of small-cap stocks both slid into "correction" territory last week—a 10%-plus fall from recent highs.
Cliff-related volatility was on display Friday when news of a cordial discussion between the two sides helped the Dow erase earlier losses and close 0.4% higher after a 100-plus-point round trip.
There are, of course, other reasons for the stocks' malaise—Europe's never-ending woes, China's political transition and the fogs of war descending on the Middle East, among others. But fears over lawmakers' ability to tackle an issue that is both technically complex and politically fraught are overwhelming.
A poll of participants at the WSJ event revealed that CEOs who believed New Year's Eve would arrive without a deal outnumbered the optimists by two to one.
Market psychology and recent history play a part here. While many laypeople believe common sense will prevail and a deal will be struck, traders and bankers hark back to two traumatic examples of Washington's ineffectiveness.
The first was the "TARP crash" of Sept. 29, 2008, when, in the middle of the financial crisis, Congress saw fit to reject the Troubled Asset Relief Program to bail out banks, sending stocks into a tailspin. The Dow lost 778 points, or nearly 7%, that day. The stunning decision was reversed days later, but for many investors the damage had already been done.
The second was the unseemly haggling over the "debt ceiling" last year. The affair ended with an 11th-hour deal but it set up a period of investor unease that culminated in Standard & Poor's decision to strip the U.S. of its AAA rating. In fact, the current four-week losing streak by the Dow is the longest since August 2011, the month of the debt-ceiling deal and S&P's downgrade.
Over the next few weeks, politicians and commentators will saturate the airwaves with "cliff-talk." But from where the markets are standing, what lies ahead looks a lot more like a roller coaster than a cliff.
—Francesco Guerrera is The Wall Street Journal's Money & Investing editor.
Outside the Beltway, the markets and the corporate world are watching, puzzled, worried and less than impressed.
The tussle over the "cliff"—a $500-billion combination of tax increases and spending cuts that will come into effect in January absent a bipartisan deal—is unsettling investors and spooking corporations right when the global economy needs the U.S. to do its part to drive growth and rebuild confidence.
..
President Barack Obama, accompanied by House Speaker John Boehner, speaks to reporters at the White House on Friday.
The dozen or so chiefs of financial companies who attended the CEO Council identified the instability brought about by the cliff's negotiations as their paramount concern, trumping longtime favorites such as regulation and economic sluggishness.
As Stephen Schwarzman, the chairman and chief executive of the private equity group Blackstone Group LP BX +5.28% said, "What we concluded, pretty much across the board, is that driving off the fiscal cliff has unpredictable outcomes, few of which could be good. And that it's unclear how consumers, markets and other constituencies would react to that, which adds an additional dynamic to trying to get a deal done."
If that sounds obvious to you, then you aren't a Washington power broker. My sojourn in the capital provided some worrisome evidence that the two sides are fully prepared to engage in a game of political football right on the edge of the fiscal cliff.
There was the former member of President Obama's economic team who asked who would care if political stalemate caused a credit downgrade of the U.S. (Answer: a lot of investors), the politicians from both sides who talked of the need to strike "the right deal" rather than "any deal" and the Congressman who confidently predicted that markets "would understand" if a resolution were to be delayed by a week or two into 2013.
Despite Monday's rally, there are few signs of the markets' capacity for "understanding." Before Monday's gain of more than 207 points, the Dow Jones Industrial Average had dropped in six of the last eight sessions since the Nov. 6 presidential election put the cliff on the horizon.
Blue-chips aren't the only ones feeling the pinch. The technology-heavy Nasdaq Composite Index and the Russell 200 index of small-cap stocks both slid into "correction" territory last week—a 10%-plus fall from recent highs.
Cliff-related volatility was on display Friday when news of a cordial discussion between the two sides helped the Dow erase earlier losses and close 0.4% higher after a 100-plus-point round trip.
There are, of course, other reasons for the stocks' malaise—Europe's never-ending woes, China's political transition and the fogs of war descending on the Middle East, among others. But fears over lawmakers' ability to tackle an issue that is both technically complex and politically fraught are overwhelming.
A poll of participants at the WSJ event revealed that CEOs who believed New Year's Eve would arrive without a deal outnumbered the optimists by two to one.
Market psychology and recent history play a part here. While many laypeople believe common sense will prevail and a deal will be struck, traders and bankers hark back to two traumatic examples of Washington's ineffectiveness.
The first was the "TARP crash" of Sept. 29, 2008, when, in the middle of the financial crisis, Congress saw fit to reject the Troubled Asset Relief Program to bail out banks, sending stocks into a tailspin. The Dow lost 778 points, or nearly 7%, that day. The stunning decision was reversed days later, but for many investors the damage had already been done.
The second was the unseemly haggling over the "debt ceiling" last year. The affair ended with an 11th-hour deal but it set up a period of investor unease that culminated in Standard & Poor's decision to strip the U.S. of its AAA rating. In fact, the current four-week losing streak by the Dow is the longest since August 2011, the month of the debt-ceiling deal and S&P's downgrade.
Over the next few weeks, politicians and commentators will saturate the airwaves with "cliff-talk." But from where the markets are standing, what lies ahead looks a lot more like a roller coaster than a cliff.
—Francesco Guerrera is The Wall Street Journal's Money & Investing editor.
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