Regardless of the outcome of the fiscal cliff, lets look at where the equity markets are in terms of value.
Conventional wisdom apparently reasons any decent resolution to the fiscal cliff problem will send equity markets higher and interest rate markets lower (higher rates). Various reasons are applied most notably is the uncertainty element shall be removed and thus release the upside horde in large part because of the forever anecdotal "cash on the sidelines".
However, many are looking at the equity markets only in terms of its current price being as high as it can get without more good news. So it has a set point bias. The fiscal cliff has set up this line in the sand reference point where resolution is good and non resolution is bad. But since the market sits at a price location much higher than its 2008 lows, it needs to rationalize the best possible outcome to maintain value. Thus, to slightly modify the disposition effect, the market is less willing to recognize potentially downside market moves and more willing to accept positive upside moves.
To understand the bulls; real estate, technology growth, and greater economic expansion will be positively influence by fiscal cliff resolution. But the market may want to concern itself more with some of the least positive potential outcomes. One of these is that large advances in equity prices over the last several years and certainly advances this year have led to a potential over subscribed market. That does not mean there are not reasonable explanations to explain valuations, but there are simply fewer participants to take the markets higher. And if the cash on the sidelines is the only hope, be aware most of investor reserves represent a generational cash stockpile reflecting loss aversion; people would prefer avoiding losses than acquiring gains. Thus the greatest potential outcome for the market may be down whether the fiscal cliff crisis is resolved or not.
