Kristina Hooper, CFP®, CIMA® is head of investment and client strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The political posturing and continued impasse over taxes and government spending is enough to make investors dizzy. Unfortunately, markets are gripped by a tug-of-war in Washington right now. But getting emotional over the fiscal cliff may distract investors from their long-term goals—and more tangible threats to their portfolios.
Stocks fell nearly 2% last week on concerns about the impending fiscal cliff. With the deadline for expiring tax breaks and automatic spending cuts just hours away, Congress has yet to reach an agreement. Investors are spooked. And they’re not the only ones. Consumers appear to be worried as well, based on the latest report on consumer confidence. Indeed, the Consumer Confidence Index dropped to 65.1 in December from 71.5 in November. Interestingly, though, they’re more optimistic about current conditions than they are about the future.
According to the Conference Board, consumers’ assessment of current conditions improved in Decembe: 17.1% of individuals surveyed classified business conditions as “good,” up from 14.6% in November. In addition, 27.3% of respondents classified business conditions as “bad,” down from 31.2% in the previous month. Even consumers’ current view of the labor market was fairly positive. While those surveyed who described jobs as “plentiful” fell to 10.3% from 11.0%, those describing jobs as “hard to get” dropped to 35.6% from 37.4%.
However, there is a real disconnect between their views toward today’s environment and their outlooks for the future. In fact, consumers’ outlooks for the future darkened in December. Those who expect business conditions to deteriorate in the next six months increased to 21.3% from 15.8%. And only 17.6% of consumers anticipate business conditions will improve over the next six months, down from 21.3%. The same goes for the job market. The future employment outlook is decidedly more pessimistic than the current view: those anticipating more jobs in the near term declined to 17% from 19.5%, while those expecting fewer jobs increased to 27.3% from 21.2%. And while the percentage of consumers expecting an increase in their incomes was static at 15.4%, those expecting their incomes to fall rose to 18.7% from 15.6%.
The fiscal cliff has even impacted investor psyches, at least among retail investors. In November alone, individual investors withdrew $19 billion from stock funds. However, this trend does not extend to institutional investors. While retail investors have pulled more than $147 billion out of stock funds in 2012, institutional investors have actually increased their net exposure by over $113 billion.
Clearly, the other major disconnect is between institutional and retail investors. So what do institutional investors know that retail investors don’t know? First, despite the media alarm, there’s still a chance that a deal will be struck soon, averting much of the damage that could be caused by going over the cliff. Second, perhaps many institutions recognize that the fiscal cliff may not be as impactful as the media hype would suggest. After all, it’s more like a “fiscal slope” than a fiscal cliff anyway, with sequestration set to occur over the course of a decade. Third, fiscal cliff or not, we still need to invest with an eye toward long-term goals—and we won’t get there by parking all assets in cash or even traditional fixed income.
This rationale seems to be supported by what companies are saying about the fiscal cliff. According to FactSet, most of the companies that have covered the potential impact of the fiscal cliff during their fourth-quarter earnings calls have made comments that fall into one or more of three categories: “they haven’t seen an impact yet, they still believe a deal will get done and are not forecasting an impact yet, or they are unable to forecast an impact.”
As of this writing, negotiations continue and there remains the potential for a deal soon. The outcome of the fiscal cliff negotiations—as well as those surrounding the debt ceiling—will obviously have a big impact on the direction the stock market takes in the near term. But deal or no deal, individual investors can take a page from the institutional investor playbook:
||Be well diversified.
||Invest in asset classes poised for positive real returns.
||Stick to a long-term plan despite short-term fluctuations.
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