Everyone else seems to be commenting on the fiscal cliff so I thought I would put in my two cents worth as well. The recent see-sawing of the markets is indicative of the lack of confidence that the big players have in the ability of our congress to make an appropriate move to avoid falling off the cliff and throwing the country into recession.
Every word that comes from Washington, be it from the White House, Congress, or the FED moves the market. If it is an optimistic word the market goes up, pessimistic, it goes down. Meanwhile the other signs in the market seem to be improving. Unemployment is edging down, housing starts are edging up, and the major corporations seem to be doing fairly well while holding onto a tremendous amount of cash.
From the standpoint of the long term investor interested in either current or future income from their portfolio, this is a time to really focus in on high quality dividend paying stocks. While I don't believe that our congressional leaders would be so foolish and stubborn as to allow us to fall back into recession, anything can happen in the current extremely polarized and partisan environment. It is possible that it may happen that they allow us to go over the fiscal cliff and, if so, we could see an immediate drop in the DOW of 1000 points or more. On the other hand it may not happen (probably won't) and when that becomes evident (announced) we could see a very substantial rally.
So, what to do? No one has a crystal ball, especially me, but my best guess is that if our leaders let the end of the year come and go without resolving the problem, and allow us to go over the cliff, the market will drop significantly... but then early in the first quarter they will pass legislation and retroactively save the day, and the markets will come charging back. This may prove to be an outstanding trading opportunity for those nimble traders who guess right, have gone to cash prior to the drop, buy at the bottom and then sell when the market surges. As for me, that is just too much guess work, crystal ball gazing and speculation. Rather, I believe that for long term income oriented investors that this is a time to evaluate your portfolio from a more conservative standpoint.
There are many "dividend aristocrats" and "dividend champions" (stocks with long term histories of raising dividends every year) out there that are currently undervalued. I believe it is a time to pare down any riskier stocks, or stocks that have fallen below your original buying criteria and to load up on fundamentally undervalued long term dividend growing stocks. They have been through many a crisis in the past and have continued to grow despite whatever economic adversity they may have faced. For lists of these equities to start your due diligence simply Google dividend aristocrat or dividend champion.
In the end, I believe that our leaders will not allow us to go over the fiscal cliff, but it is always best to hope for the best, but prepare for the worst. Stocks with a long term history of growing dividends through wars, recessions, catastrophes, etc. are not a bad way to go, no matter what happens.
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