On Thursday, the major U.S. stock indices fell for the second day in a row with the S&P 500 moving below its 200-day moving average. However, even pessimistic analysts do not believe that the market fall will resemble a falling knife from here on, as it encounters pretty strong support at these levels.
The primary concern for investors remains the ‘fiscal cliff’. Under the worst case scenario of gridlock in Washington, D.C., some $600 billion in tax hikes and expenditure cuts will go into effect in early 2013. Under these circumstances a feeble U.S. economy would go once again into recession. Investors are concerned about possible increases in dividend and capital gains taxes.
A more plausible solution would be that Washington may reach a stop-gap solution. In this context, the International Monetary Fund (IMF) urged the U.S. government to quickly reach a composite solution rather than adopt a temporary fix. However, the IMF believes that a cliff remains a ‘medium-term’ possibility, which would cause significant harm to the economy.
Standard & Poor’s Rating Services, a part of The McGraw-Hill Companies, Inc. (MHP), believes that despite a 15% probability of a fiscal cliff, the most likely situation is a timely compromise by the Administration, which would help avoid most of the negative consequences of a cliff.
Other analysts pointed to myriad factors which may be raising investor worry. The mountain of government debt in the U.S. is a cause of concern with the IMF calling for a credible debt reduction plan. The debt ceiling needs to be raised in order to avoid a temporary shut down of the federal government. Then, ECB President Mario Draghi stated that the German economy is being pulled down by a moribund Europe. The German economy has shown signs of weakening of late with a falling trend in exports. Also, in Greece, a weak coalition passed an austerity plan.
We believe that pharmaceutical and consumer staple companies, such as Johnson & Johnson (JNJ), Bristol-Myers Squibb Company (BMY) and Procter & Gamble Co. (PG) may be able to better withstand different economic conditions. Investors may consider these to be relative safe havens.