Trader Talk

Another Market Debacle...And With Good Reason

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Another market debacle, and with good reason: The apparent failure of the deficit committee means another 12 months of uncertainty over deficit reduction and the direction of tax policy. That is a clear negative.

I don't understand why we have had people on our air insisting that we have known all along the deficit committee will fail and therefore it is not an important factor for the markets.

Ahem: The market action today is telling us this is wrong.

We have very lopsided market internals: 44-1 down volume to up volume at the New York Stock Exchange, more than 12 times as many declining stocks as advancing stocks. That tells you there is a lot more volume going to stocks on the downside than the upside.

The uncertainties are the problem. Example: Now that the deficit committee appears to have thrown in the towel, what happens to the 2 percent payroll tax cut due to expire at the end of the year?

Kimberly Dixon, chief market strategist at JP Morgan, noted this morning that if the payroll tax cut is eliminated, "and discretionary spending is held to the caps agreed to in August, there is a significant risk that the economy will suffer too much 'fiscal drag' entering a new year, undercutting some small signs of momentum which have emerged in recent weeks."

What happens to the Bush tax cuts? There was hope that the committee would address the issue, but they have not. They are scheduled to expire at the end of 2012.

Greg Valliere at Potomac Research noted this morning that President Barack Obama may kill the tax cuts in December of 2012, regardless of whether he wins or not. That means another year of uncertainty on capital gains, dividend taxes, and the top tax bracket.

It's not just the action today: Recent history tells us the failure of the committee is bad for the markets. The political turmoil around increasing the debt ceiling in July and August was a major reason Standard & Poor's downgraded U.S. debt on Aug. 5. That earthquake — the S&P 500 dropped 80 points on the news, the VIX went from 32 to 48 — is still being felt.

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