We attempt to gauge how much FC will impact stock markets. Take S&P 500. Its
current level is 1,402. Recent peak is 1,474. Recent low is 1,258. Assume
the index drop 10% going over the cliff, flat if the cliff is postponed and
increase 10% if a deal is reached to address fiscal cliff. The probability
of 60%, 10% and 30% are assigned to the above scenarios respectively. It
follows the probability weighted expected index value is 1,360 (email us if
you have any question). At 1,360, it is implied that the index drops 3.0%
from current level, 7.7% from recent peak but is still 8.1% better than
recent low. Fiscal cliff feels bad but it might not be as scary as the term
implies. Individual stocks presumably react to FC differently. Through
careful portfolio review and positioning, investors may be able to sleep
better in the days ahead.
