Republicans and Democrats have yet to come to an agreement to avoid the so-called fiscal cliff.
The dispute involves whether to increase taxes or cut spending and to what degree to do both. Regardless of the outcome of these discussions domestic economic growth is bound to decelerate both options will help cut the huge amount of government debt however each will cause consumer spending to drop, job losses and lower business investment thereby lowering US GDP output.
Traders on Wall Street have been speculating on whether a deal might be reached thereby causing great fluctuations in the stock market, however the ultimate result of these discussions will surely mean pain for the US economy.
The market is currently trading at about 10 times earnings making it quite attractive and undervalued assuming forward earnings estimates are correct and that growth will come as analyst predict.
Corporate earnings fell 4% in third-quarter and are expected to rise in the coming quarters. Over the next four quarters earnings are expected to increase on average 4% according to analysts estimates
Once again in my opinion those estimates are overly rosy at best I see economic growth increasing by 1.5% to 2% over the next year.
Congressional leaders will do their best to push economic growth along regardless of their intentions with the deficit.
Based on my estimate for forward earnings growth I put the S&P 500 trading at about 14 times earnings slightly below the markets long run average so in my opinion the market is neither cheap nor expensive.
I continue to remain heavily invested in cash in the event that congressional leaders botch this completely and send the US economy into a recession again. I still believe we are a few years out from seen a sustainable increase in stock prices and believe that the current fluctuations in the market have been caused by nothing more than free money from the Federal Reserve finding no better home.
Government must cut spending including entitlement programs and it must raise taxes from a broad-base of taxpayers in order to pay down the debt which becomes the country's major problem for the future.
It is going to take some short-term pain for the markets that has not currently been reflected in market prices. I'm waiting for significant decline in the S&P 500 to below 1300 before I'm going to get back into the market.
It is only when we get to see the actual details of the deficit reduction strategies when the market will begin to realize economic growth in this country is not going to be his fast as many analyst predict.
On a side note we just bought some shares of Hershey company HSY for my girls after visiting Hershey theme park. Most definitely a recession resistant industry. Almost everybody loves chocolate!
By the way please forgive any typos or misspellings as I did this blog posting completely with voice recognition software.
