Sadly there was no call for Morning Glory, The Masterplan or Champagne Supernova. Indeed one might well argue that despite the agreement to avert the worst ravages of the fiscal cliff, we have once again been Hung in a Bad Place by the politicians. That’s enough Oasis…
As we were waking up yesterday morning, the US Senate was overwhelmingly agreeing to a deal that would restore some semblance of calm to the US economy. The 89 to 8 vote hid a lot of pain that had been created and we would argue that the damage had already been done and the pathetic and irresponsible horse-trading over the agreement have once again shown the US politicians in a very bad light, including the respective party leaders and the President, himself.
Indeed, if there was ever a pyrrhic victory in modern politics it was this, although the President will doubtless claim victory, as there were tax rises forced upon the wealthiest. For those more needy Americans there was an extension of the previous cuts for those earning up to $450,000 and maintenance of benefits for the unemployed. There were increases to both inheritance and investment income taxes, but the latter was not as harsh as we had feared possible.
US GDP will likely grow at a 1% annualised rate in Q1 2013, down from 3.1% annualised in Q3 2012. This will be caused by the rise in payroll tax back to 6.2%, having been cut to 4.2% applicable last year. The expiration of the payroll tax cut could take $125m from consumers’ pockets.
On a more positive note, the learned at JP Morgan and Bank of America believe, like we do, that the expansion will strengthen later in the year as the housing market continues to rebound. The package will reduce growth, but not eliminate it and once the dust has settled after this miserable episode, we hope that confidence and, by implication, growth can improve.
Despite a large number of Republican dissenters, there was a smooth passage in the House of Representatives overnight and President Obama is now set to sign the tax deal in to law. Clearly the US political rumblings are far from over, with the Republican members of Congress (Senate) already promising a bruising battle over the necessary increase to the debt ceiling and they are demanding a number of tax cuts.
President Obama is refusing to go down the same road again. Sadly he may not have a choice. As we stand, the US runs out of headroom in late February, so the politicians will sadly need to rejoin battle very soon.
US markets reacted positively to news of the emerging deal on New Year’s Eve, with the S&P 500 posting its best last day gain since 1974, rising 1.6% and therefore eradicating much of the previous week’s losses. Undoubtedly much of the move was short-covering, rather than real activity. The big gains helped the US to a 13% gain for the year, which is undoubtedly a healthy gain but below the 20%+ returns of Germany, Japan and Hong Kong.
There will be many who want to take positives from this last minute deal and expectations were set pretty low over the past week or so, so there is certainly scope for markets to rise higher in the coming sessions, as we have seen in Asia and European/US futures this morning. Indeed, despite the politicians’ best (worst?) efforts, we have not altered our view that 2013 has the potential to be a decent year for equities.
However, the scars will run deep and the rabid atmosphere among the US politicians has just got more poisonous. The biggest risk to markets in 2013 is the politicians and sadly the end of 2012 does not augur well.
