If any good can be found in the fiscal cliff it might be the cuts in government spending. Without bloated budgets, regulators may have to slow down the pace of new regulations. However, even if $1 trillion is cut from the projected budget, the U.S. government is expected to spend more than $50 trillion in the next 10 years and the number of regulations issued will be able to rise no matter which party holds power. This regulatory cliff threatens investors much more than the current crisis does.
Obamacare will largely take effect in 2014 and new rules are being prepared that will make businesses and individuals pay for healthcare whether they want to or not. Economists generally realize that healthcare can’t be free and the dollars spent to deliver government-mandated benefits will reduce spending elsewhere.
More healthcare probably means lower profits for businesses and lower salaries for employees. This has two impacts investors need to consider. Lower profit margins could lead to lower stock prices and there will be less demand for stocks as individuals have less money to invest. Stock prices should adjust to these new realities in 2013.
Editor's Note: 5 Signs Stock Market Will Collapse in 2013
In academic theory, stock market prices are believed to reflect what is likely to happen in the future. In the real world, coal stocks offer a lesson on how this process works. On Dec. 14, the Environmental Protection Agency released new rules that limit the amount of pollution that can be in the air and makes it more difficult for coal-powered plants to operate. The rules were expected and the stock prices showed that the rules would hurt coal companies a year before the specifics were known.
The chart below shows Market Vectors Coal exchange-traded fund (KOL) and the Standard & Poor’s 500 is shown as the black line. Until August 2011, the two moved almost in lock step. KOL started falling about a year before the new rules were announced.
Stock market investors anticipated that the changes would be negative for coal companies and sold ahead of the news.
Costs for Obamacare and additional regulations won’t be known for some time, but traders aren’t going to wait for the details. As an outline of the costs ahead becomes clear, expect to see more selling in the stock market.
In the year ahead, there may be increased volatility in the stock market. Decreasing exposure to U.S. stocks seems like the best New Year’s resolution investors can make.
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