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Fiscal Cliff Fear Hasn’t Set in Yet

Ian Wyatt

When the market closed at 4 p.m. ET on Election Day, the S&P 500 finished at 1,428.39. With President Obama’s re-election that night, fiscal cliff fear replaced pre-election uncertainty at the forefront of investors’ minds. Wall Street pundits predicted that stocks would go in the tank until Congress could reach a deal to avoid the so-called cliff.

Fast forward to this morning, and nothing has changed. Literally.

The S&P 500 opened at almost the exact same level – 1,427.84 – and Congress appears no closer to a fiscal cliff compromise.

It’s December 12 – less than three weeks before the impending doom of Obama’s Budget Control Act takes full effect on January 1. Where’s all the investor fear every talking head and blogger (including yours truly) warned us about?

It seems to have come and gone. Though as we inch closer to the fiscal cliff deadline, it’s sure to be back. With a vengeance.

So far, however, the fiscal cliff hasn’t wreaked havoc the way everyone said it would.

At first it did. The S&P fell off 5.3% in the first seven trading sessions after the election. But stocks have since rallied, getting a nice boost from another record-setting Black Friday along the way.

The benchmark U.S. index has now risen for five straight days. Meanwhile, the VIX – a.k.a. the investor fear gauge – is declining, dipping to its lowest point all month this morning.

Don’t get too comfortable, though. All is quiet for now, but to realize just how quickly the market can go south all you have to do is think back 18 months, to July 2011. That was the last time the Congress held the U.S. economy hostage in moving at a snail’s pace to come to some sort of fiscal agreement.

Raising the debt ceiling – or risk defaulting – was the issue on the table then. Similar to this past month, the S&P was basically flat for the first three weeks of July, actually gaining five points.

But once it got to within a week of the August 1 deadline and a deal still wasn’t done, the bottom fell out. From July 25-31, the S&P declined 4% as fear of a default finally set in. It took a while, but eventually investors panicked.

Americans are chronic procrastinators. We don’t fully grasp the reality of something until the last minute. That’s what happened in July 2011. And if Congress doesn’t come to an agreement in the next week, it’ll happen again.

The fiscal cliff is very real. Soon enough, investors will realize it.