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Home>Daily Capital>Investing & Markets>Plan B Fails; Obama Still Optimistic

Plan B Fails; Obama Still Optimistic

Market Digest – Week Ending 12/21

Early optimism for a fiscal cliff solution faded when House Speaker Boehner’s “Plan B” failed to win support in his own party. Stocks dropped on the news but remained positive for the week. Boehner said he would continue to work with the President to avert the cliff before the January 1 deadline. Plan B would have maintained current income tax rates for individuals earning less than one million dollars. Somewhat lost in the noise, revised Q3 GDP was announced at 3.1%, ahead of most expectations. Treasuries and gold fell.

Weekly Returns:

S&P 500: 1,430 (+1.1%)

MSCI EAFE: (+0.8%)

US 10 Year Treasury Yield: 1.76% (+0.06%)

Gold: $1,656 (-2.3%)

USD/EUR: $1.318 (+0.2%)

Major Events:

  • Monday – Reports circulated that Obama was considering an adjustment to the Social Security cost of living adjustment formula as part of fiscal cliff negotiations.
  • Wednesday – The White House said it would likely veto the current “Plan B” which would extend tax cuts on income less than one million dollars.
  • Wednesday – US building permits for November rose to a four year high, suggesting the housing recovery will extend into 2013.
  • Wednesday – UBS admitted rigging LIBOR rates and agreed to a $1.5 billion settlement.
  • Wednesday – US Q3 GDP was revised up to 3.1%, ahead of most expectations.
  • Thursday – Sales of existing US homes in November rose to a three year high.
  • Friday – Speaker of the House Boehner said he was “prepared to come back if needed”, after he was rebuked by his own party on an alternative fiscal cliff solution.

Our Take:

Unfortunately, it appears our earlier prediction is coming true—a fiscal cliff compromise in 2012 looks increasingly unlikely. Boehner’s inability to get his party’s support to raise taxes only on income above a million dollars suggests compromise will be difficult. Still, we expect resolution in the early part of next year. Pressure continues to build as voters become increasingly upset. Once we enter 2013, any legislation will technically be a tax cut and will be easier to pass. Expect more political volatility in the coming weeks, but a solution should eventually be reached.

As the markets approach the 2012 finish line, it is worth noting that international stocks caught up to US stocks after lagging during the height of the European debt crisis. Both are up about 15% for the year. Within the US, small cap stocks are on pace to finish with a very similar gain. Foreign bonds did well, and foreign REITs were up more than 30%. 2012 was a year when almost every asset class provided satisfying absolute gains. But correlations between asset classes were high and diversification benefits were muted. Like markets, correlations rise and fall. After a year like this, it is important not to forget the incredible benefits proper diversification provides over full market cycles.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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