The U.S. Fiscal Cliff Threatens Confidence, And Future S&P 500 Earnings Just over one dozen senior-level executives, representing a diverse cross-section of U.S. financial sector corporations and industries, took the highly unusual step of publicly urging the President and Congress to put partisanship aside and take "concrete steps to restore the U.S.' long-term fiscal footing." While the looming "fiscal cliff" has been a topic of grave concern for investors since the start of the year, the market has mostly taken its cues from other issues, e.g., the European sovereign debt crisis, the prospect of additional nonconventional monetary stimulus from the Fed (i.e., QE3), and the risk the U.S. economy could join Europe in recession. The Global Markets Intelligence (GMI) research team believes an unusual lack of clarity is currently associated with the threats tied to the fiscal cliff, leaving investors with the conclusion that the combined negative effects of substantial tax increases and mandated federal spending cuts are so detrimental to the fragile economy that Congress will have little choice but to first delay the occurrence, then never let it happen in the first place. The Oct. 18 letter from the Financial Services Forum addresses a very serious concern, which these executives summarize as the "consequences of inaction." We agree with this sentiment wholeheartedly, in that extremely elevated levels of business and consumer uncertainty--evident throughout this business cycle in terms of slow job creation, cautious credit extension by banks, and consumers' reluctance to purchase homes and automobiles--could become even more tentative if lawmakers delay, or worse, avoid addressing existing fiscal challenges. We believe the close ties between confidence, the economy, and financial markets are very real. The 15% year-to-date rise in the S&P 500 Index mostly has been in anticipation of healthier future economic and corporate earnings growth both in the U.S. and abroad. The pledge from ECB President Draghi to do "whatever it takes to preserve the euro," along with the Federal Reserve's efforts to invigorate the nascent U.S. housing market recovery as a path to lowering unemployment, have done more to push stocks higher this year than either reported second-quarter or expected third-quarter S&P 500 earnings. From this perspective, 2012 stock market performance can be seen as a leap-of-faith anticipation rally as opposed to a fundamental earnings-driven rally. For S&P 500 earnings specifically, the stage is set for either a business/consumer-confidence-led Lookout Report from Global Markets Intelligence October 26, 2012 Michael G Thompson Managing Director Global Markets Intelligence (1) 212-438-3480 [email protected]Robert A Keiser Vice President Global Markets Intelligence (1) 212-438-3540 [email protected]The Lookout Report is a compendium of current data and perspectives from across S&P Capital IQ and S&P Indices covering corporate earnings, market and credit risks, capital markets activity, index investing, and proprietary data and analytics. Published bi-weekly by the Global Markets Intelligence research group, the Lookout Report offers a detailed cross-market and cross-asset view of investment conditions, risks, and opportunities. 1031028 | 301128617
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The U.S. Fiscal Cliff Threatens Confidence, And Future S&P 500Earnings
Just over one dozen senior-level executives, representing a diverse cross-section of U.S. financial
sector corporations and industries, took the highly unusual step of publicly urging the President
and Congress to put partisanship aside and take "concrete steps to restore the U.S.' long-term
fiscal footing." While the looming "fiscal cliff" has been a topic of grave concern for investors
since the start of the year, the market has mostly taken its cues from other issues, e.g., the
European sovereign debt crisis, the prospect of additional nonconventional monetary stimulus
from the Fed (i.e., QE3), and the risk the U.S. economy could join Europe in recession.
The Global Markets Intelligence (GMI) research team believes an unusual lack of clarity is
currently associated with the threats tied to the fiscal cliff, leaving investors with the conclusion
that the combined negative effects of substantial tax increases and mandated federal spending
cuts are so detrimental to the fragile economy that Congress will have little choice but to first
delay the occurrence, then never let it happen in the first place. The Oct. 18 letter from the
Financial Services Forum addresses a very serious concern, which these executives summarize as
the "consequences of inaction." We agree with this sentiment wholeheartedly, in that extremely
elevated levels of business and consumer uncertainty--evident throughout this business cycle in
terms of slow job creation, cautious credit extension by banks, and consumers' reluctance to
purchase homes and automobiles--could become even more tentative if lawmakers delay, or
S&P Index Commodity Commentary: Industrial Metals Lead October Declines
Commodities have come under pressure in October--along with most other risk assets--because of global economic
concerns, measured by the 4.22% month-to-date decline in the S&P GSCI (Oct. 24). The economy-sensitive industrial
metals sector led decliners, measured by the 7.49% decline in the S&P GSCI Industrial Metals index, reversing gains in the
broad S&P GSCI to show a loss of 0.89% for 2012. Only the livestock sector gained in October, measured by the 3.06%
month-to-date increase in the S&P GSCI Livestock index. Diminishing supplies because of the drought, with increasing
global demand and declining feed grain prices have supported livestock prices recently. Year-to-date, agriculture remains
the strongest-performing major sector, as measured by the 16.65% 2012 gain in the S&P GSCI Agriculture index,
although lessened by the 1.51% decline in October. Better-than-expected Northern Hemisphere harvest results pressured
grains recently, but drought-diminished yields in some of the world's major growing regions have helped the S&P GSCI
Grain index become the best-performing sub-index, with a 2012 gain of 29.56%.
Energy compared with non-energy
Because of its greater world-production-based weight in the broad S&P GSCI, the 4.99% month-to-date decline in the
S&P GSCI Energy index has been the largest drag on broad index returns, in October and in 2012. Year-to-date, the S&P
GSCI Energy index ended Oct. 24 with a decline of 4.47%, compared with a gain of 7.49% for the S&P GSCI
Non-Energy index. The largest single commodity drag on energy returns thus far in 2012 is U.S. based WTI crude oil, as
measured by the 16.42% year-to-date decline in the S&P GSCI Crude Oil index. Due to refinery-related supply issues and
rolling into a backward shaped future curve (when further out futures trade at lower prices), unleaded gasoline has been
the best-performing commodity in the energy sector in 2012, as measured by the 20.67% increase in the S&P GSCI
Gasoline index despite a 7.25% decline in October. Year-to-date, the spot S&P GSCI Unleaded Gasoline index has
actually declined 2.49%. Declining energy costs in North America are becoming quite compelling and global business is
responding accordingly, as evidenced by the front page article in the Oct. 24, 2012 edition of the Wall Street Journal,
"Cheap Natural Gas Gives New Hope to the Rust Belt." Many analysts have noted that since 2008, the energy sector has
been relatively highly correlated to the S&P 500 Index. Many hope that the fundamental differences in asset classes will
prevail and recent weakness in energy prices will be beneficial to business and consumers, subsequently supporting equity
prices.
The U.S. Fiscal Cliff Threatens Confidence, And Future S&P 500 Earnings Lookout Report from Global Markets Intelligence
20 October 26, 2012
1031028 | 301128617
Chart 12
Contact Information: Mike McGlone, Senior Director—S&P Dow Jones Indices, [email protected]
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