Stocks have rebounded sharply from the recent sell-off of about 9%, rising from about 1,350 on the S&P 500 to the current 1,440 or so, or by about 6.7%. Optimism over a possible deal from Congress and the President on the fiscal Cliff-the expiration of the Bush-era tax cuts and spending cuts set to go into effect January 1, 2013-has been largely responsible for this rally, despite many other serious challenges for the economy. These challenges include the government running up against the debt ceiling once again, high unemployment, sluggish economic growth, weakening consumer spending and confidence, economic problems across Europe, and a host of other problems.
Should we get a deal on the fiscal cliff, it will likely be a short-term fix-a band-aid-and therefore will be unlikely to address the core challenges we face, including dealing with our national debt and massive ($1 trillion+) annual budget deficits, and driving economic growth at the same time. Whatever the deal, stock may sell-off once the deal is inked, given these continuing challenges and the short-term nature of that deal. Valuations remain expensive, given the slow economic growth and high unemployment. Without a long-term (real) solution to the current economic and debt situation, there will be little reason for investors to continue to purchase stocks, at least until valuations adjust down to more favorable levels. I remain largely in cash.