Another nasty showdown finally ends on Capitol Hill after House Republicans caved into rising political pressure and accepted the Senate's very short-term bill to extend the 2% payroll tax cut for working Americans. Amazingly, most members of Congress weren't even in Washington, DC for this latest battle; they were already home for the holidays after closing out 2011 on a low note.
Needless to say, the New Year promises to bring more contentious battles including, well, the very same payroll tax cut which was only extended for two months, the $1.2 Trillion in automatic deficit cuts (remember the Super Committee failure?), the expiration of the Bush tax cuts, the fate of Consumer Financial Protection Bureau, a Supreme Court ruling on the constitutionality of Obamacare, and efforts to weaken Dodd-Frank financial reforms. All this as a potentially monumental presidential election cycle kicks into overdrive.
So what does this all mean for investors?
"A lot of people look to elections to try to decide which way the stock market is going; I think that's a logical way to think—mechanical causality," says Robert Prechter, founder and president of Elliott Wave International. "Mine is the opposite, I look for mood as the major cause."
And Americans are in no mood for political bickering. Congress literally closed out this year on a dour note; with a historically low, record-breaking 11% approval rating according to the latest Gallup poll. The legislative branch earned its contempt.
As for President Obama, his stock is rising. A CNN-ORC poll shows the president's approval rating bounced to 49%, the highest level since May when Osama bin Laden was killed.
And of course, the stock market votes everyday on policies and business events. Price action can tell you a lot about policy approval, and perhaps even more.
"We think the stock market actually is a better predictor of who's going to win the election, than the election is of where the stock market is going," Prechter contends. "This coming year, if my scenario works out, stocks are likely to be lower. And if that's true, the incumbent is likely to be thrown out, not be reelected."
It's tough to tell what 2012 holds, particularly when we still can't predict whether the broader stock market will end 2011 in positive territory. This one is truly coming down to the wire.
According to Bob Prechter's analysis, the market is in a major topping process, or what he calls a "grand super cycle top, bigger than in 1929." Therefore his outlook for stocks next year is gruesome, to put it softly.
"A down market is pretty much a guarantee that the current incumbent will not stay in (office). If it's an up market, and I'm wrong, then he's likely to be reelected," he says.
Only time will tell. But in the meantime, some parting advice: "Be safe, be cautious, don't join any of these bubbles and run-ups because you're going to have a terrific buying opportunity about four or five years from now," says Prechter.
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