So the debt ceiling crisis has been averted. Now it’s time to look ahead at both where we are in the market and where we are in the economy. First, let’s look at what finally came out of all these negotiations in Washington. As I wrote earlier, once the the chance of having no deal by Aug 2nd subsided, we’d have to start looking at what the agreed upon deal looks like, and what it means for the economy. The thing I was looking for is how front loaded the cuts in government spending are. From this standpoint, it looks like it won’t have a significant impact on near term GDP:
The spending cuts will proceed in two stages. There is an initial round of about $1 trillion in cuts, which will be locked in place when (and if) the deal is signed by the president. Then there is an additional $1.5 trillion in cuts, which will go into effect if Congress is unable to agree to the recommendations of a bipartisan commission (or “Super Congress”) by the end of the year.
The first round of cuts include “only” about $22 billion in reductions in 2012 spending — the same as the bill proposed last week by Representative John A. Boehner, which provided some of the outlines for this deal. That would reduce 2012 G.D.P. by just 0.1 percent, other factors being equal.
The second and larger round of cuts, according to the White House’s summary of the deal, would not include any reductions to the fiscal year 2012 budget. Instead, those cuts would kick in during 2013 and last through 2022…
… The bill, in short, is not likely to have a profound effect on the recovery in the near-term. It should be noted, of course, that the recovery still has plenty of its own problems, and that fiscal policy in 2012 will tend to be contractionary on the whole as the last vestiges of the 2009 stimulus roll off the budget and as the payroll tax cuts agreed to for 2011 expire. But that would be true even if a “clean” debt ceiling increase had been adopted with no changes to fiscal policy.Where the deal may create more problems is in 2013 and 2014. The economy may not be fully healthy by then — global financial crises often take 5 years or more to recover from. But the austerity measures will really start to kick in.
So all in all, at least in the near term, this deal won’t have a significant negative effect on the economy. In fact, having the deal finally done could have a slight positive effect on the economy. The last couple of weeks or even months of uncertainty out of D.C. could not have been good for things like consumer confidence. These things are hard to tell though. Not having a job is also bad for consumer confidence and no one in D.C. seems to be doing much about that. (The latest employment numbers come out on Friday, I can’t imagine they’ll be good)
Financial crises like the one we’re emerging from often take years to resolve from an economic damage standpoint. This recovery is playing out the same way. These latest numbers tell us is that this recovery has been slow, alot slower than we’ve become accustomed to following previous recessions during the past few decades. At least we can all stop wondering why unemployment remains so high. It wasn’t a ‘jobless recovery’ it turns out it was an ‘anemic recovery that can barely add jobs, but at least we’re not losing jobs.’
This could play out in two ways. One, we could slip into a double dip recession. Two, everyone thought the recovery was stronger than it was and was wondering why things like consumer confidence, the unemployment rate, housing starts, etc. etc were so sluggish. Maybe everyone now lowers their expectations and the economy increases its growth ever so slightly from those reduced expectations. Who knows?
So what now as far as trading is concerned? I think you have to pick levels as entry points, be very good about taking profits when things go your way and don’t try to outsmart the market. If we’ve learned anything over the past year it’s DON’T CHASE THE MARKET, DON’T PRESS THE MARKET. Look at this 6 month chart in the S&P 500, it looks like a friggin EKG:
We’re at one of those levels right now. 1285 in the S&P 500 is its 200 Day moving average. The market has made a habit of bouncing at these types of levels the past 6 months. If you were betting on breakouts or breakdowns during this cycle, you lost. I would not press this market where it is from the short side until I see a real breakdown.
In fact, I’m holding onto the XIV play that I talked about the other day to see if we bounce. If we break down (which we could, the data has been THAT bad) I’ll reassess where Vol can go and update on the site with ways to trade the position. The good thing is I got it at a decent enough level and at a small enough size that a breakdown would only present more opportunity.
The next couple of days, now that we’ve cleared the debt ceiling debate, will contain a big employment report, news out of Europe that may explain the panicked intraday reversal their markets made today, and more earnings. So plenty to talk about and trade in the next few days. Stay tuned.