As we begin 2013, the financial markets appear to only be concerned with the existence or non-existence of macro headlines and events. At the end of 2012 it looked like the market was about to nosedive because of the fiscal cliff issue. But a last minute deal sent the market up into the beginning of the year for one of the best January returns on record. There seems to be a disconnect between market movements and basic fundamentals. Chasing momentum and liquidity can be a dangerous venture because when the markets turn, all of the momentum driven gains can be wiped out in a short period of time. Surprisingly, the markets have basically returned half of an average year's return in just one month.
However, we wonder how long current fiscal policies can be sustained. Long term, secular trends with a reliance on deficit spending, ongoing stimulus, tax increases, and central bank intervention to promote growth are simply not sustainable in our opinion. Intervention is not a viable solution and there is likely going to be a cost to fix all of this. What are policy makers going to do when the economy begins to slow down again? Guess that's for someone else to worry about.
