How the "fiscal cliff" is affecting stocks

(MoneyWatch) The daily financial news is fixated on the "fiscal cliff." One recent headline read, "Stock futures rise on fiscal cliff optimism," while another said, "Stocks down as fiscal cliff scares investors."

Is the stock market really reacting to the fiscal cliff, or are the daily market fluctuations merely random movements that the media mistakenly interprets as driven by the package of government spending cuts and expiring tax breaks scheduled to take effect in January?

To better answer the question, let's take a step back. As we entered November, we were 61 days away from the fiscal cliff, with the hopes that the presidential election would open the door to political leaders reaching agreement on tax and spending policies. Now we have used up 40 of those 61 days, and the only two things both parties can agree upon are the catastrophic long-term impact of falling off the cliff and that we remain far from an agreement.

• How to play the fiscal cliff
• Elections and investing
• 7 deadly investing sins

With the clock ticking and progress seemingly slow, it would be reasonable to assume the stock market might signal its concerns by registering significant decline. Yet the market demonstrates, as it often does, that its movements are not all that reasonable and at times even unfathomable.

For instance, between October 31 and December 7, the U.S. stock market is actually up 1 percent, as measured by the Vanguard Total Stock ETF (VTI). International stocks are up 3.2 percent, as measured by the Vanguard Total International Stock ETF (VXUS). And year to date, both U.S. and international stocks are easily up double digits.

I've long been an advocate of refraining from reacting to the news and sticking to an asset allocation, but let me confess something. If I had known on October 31 that Congress would still not be making progress, I probably would have significantly reduced my exposure to stocks, as my guess would have been that stocks would be down 10 percentage points in the wake of this dismal news.  Luckily, I lack a crystal ball.

Though one could argue that the stock market is irrational or that other positive events offset the fiscal cliff talks, the reality is that for the past 40 days, the expert opinion on the fiscal cliff's impact on stocks has been grossly overstated.

The truth is that we don't know how the stock market will perform over the next three weeks -- irrespective of how the talks go -- nor can we even be certain they will decline in early January if we sail off the cliff. (Personally, in case anybody in Washington is reading this, I don't particularly want to find out how stocks will perform on the other side of the fiscal cliff).

[Forty-Four]

Seems to be helping gas prices though

[supportromney]

while the President is talking about middle class tax cuts he's actually holding them hostage. No matter how many photo-shoots Obama takes with working class Democrats: he still has the ability to extend the tax cuts- and simply refuses to do so.

Democrats fear an actual budget. After one recognizes this information to be accurate, the second thing to do is to insure there is a budget for 2013. There is a clear line drawn in America: Democrats don't want a budget and Republicans do. Since Republicans lead the House, the House should work for a very Republican budget, and expect the Senate to work for a very Democrat budget- then work out an agreement in committee. This is how America works, this is the epitome of "normal" in this Representative Democracy. Ultimately however, the taxpayers have an ace in the hole: the Automatic Budget that will become law if the politicians cannot come to agreement within the confines of the governing process. That budget is harsh, but will work beautifully for the American economy long term. Any budget that restricts the Democrats from spending the nation into fiscal ruin is a positive.

Advantages to the Automatic Budget in 2013. The Automatic Budget will decrease spending on every arm of the US Government. Every engaged citizen will find something to dislike about the budget, yet it has distinctive advantages. First and foremost, it establishes a number to the amount available to spend in the next fiscal year. This in itself is a huge advantage over the current practice of spending without acknowledgement that every dollar spent is a borrowed dollar. More than incidentally, many of those dollars are being borrowed from Communist China. Secondly, it resets the base-line spending for future budgets: it becomes the new benchmark for any increased budgetary discussions in the future. Also, it is no secret there are more Progressive Democrat dollars spent on projects that aren't delineated in the Constitution than conservative Republicans; meaning the Democrats have more to lose with that budget. The ultimate winner with that budget is the American taxpayers. For once in a generation, their government will find itself living within its means instead of its credit accounts. That in itself is huge.

[supportromney]

Finally to those who complain about the tax hikes that have already taken place, (incidentally, the bill due in April): it is disingenuous of you to vote to raise the taxes of someone else, only to complain when your taxes are raised as well. This is such an easy to understand concept that children would deem any similar comparison as "unfair".

Republicans should offer a conservative budget. House Republicans should offer their best conservative budget, the Democrats should offer their best Progressive budget, and then send the two bills through the normal process of reconciliation. If the Democrats in the Senate aren't willing to do that, then the Automatic Budget will certainly be a positive for the American economy in the long term.

House Republicans should stand firm.
Jim Davis Jacksonville grass roots examiner

[JerryNA100]

If, instead of worrying about the stock market freaking out about a so-called fiscal "cliff", you had re-phrased your post to say that Congress was considering whether some small proportion of income for a small subset of the population (only 2-3%) would be taxed at a slightly higher rate (less than 4%) in order for the government to be responsible and pay bills for programs most people want to keep, then wouldn't you sound like you're worrying too much over too small of a problem? Allan, don't buy into the hype. You're worrying too much. As I read recently, it's not a cliff- it's a curb. Even if all of the temporary tax break expiration and sequestration changes went into effect, Congress has many months to reverse anything truly awful before it can affect the economy. Don't feed the hype.

[Allan_Roth]

JerryNA100

I don't know what will happen on the other side of the cliff / curb but I don't want to find out.