Since Election Day, the S&P 500 is off 5%, just a little market correction (so far).  Most attribute this decline to worries over the “fiscal cliff.”  If you listen to the media, you would think the market is down much more than 5%.  Below is a chart to point out the market reaction around the 2011 debt ceiling negotiations.  On July 18, 2011, headlines said that a debt compromise was near.  On July 22, 2011, talks collapsed as Representative Boehner walked out.  The market then fell 17% over the next two weeks.  Interestingly, the S&P is at about the same level it was just prior to the collapse in the debt ceiling talks.  Today, Congressional leaders expressed optimism that a deal on the fiscal cliff could be achieved, but until there is an actual deal…Hopefully, our elected officials have learned a lesson.

Two conclusions:

  1. Negotiations will continue for several more weeks, accompanied by volatility in the markets based on the tenor of each day’s talks.
  2. If Washington really does drive us over the cliff, a much more severe decline awaits us.

Brief Thoughts