Cliffs, Markets, Animal Spirits

We hope everyone had a joyful and safe Thanksgiving weekend with family and friends.  Unfortunately, reality is settling in on Cyber Monday that the looming mess in Washington is no closer to being solved.  The markets are definitely spooked on this front as the general sell-off continues. This is a natural reaction after such a strong week of gains, so we view it as a potential buying opportunity that is admittedly fraught with risks.

The lack of compromise and leadership in Washington is causing this lingering market uncertainty, a fact that cannot be disputed regardless of your political affiliation.  One of the most highly publicized items on the table related to the market is the proposed tax increase on capital gains and dividend income.  It is our opinion that this could have dire consequences on the market both in the long and short term, particularly in our small-cap space, if the increases prove to be more than nominal.  Volumes are low enough already and the advent of higher capital gains taxes does not foster greater investment. Rather, it spurns it.  Needless to say, the next six weeks will provide some interesting theater.

On the bright side, by most accounts, Black Friday weekend sales were $59.1 billion, a record and an increase of 12.8% over 2011.  What does this say about consumer confidence and pent-up demand?  Perhaps, John Maynard Keynes’ “Animal Spirits” are in full play, as was written in his famous book “The General Theory of Employment, Interest and Money”, which describes how the emotions of human behavior impact consumer confidence and actions. It looks like the country may be sending a message to Washington, “Get your act in gear!” 

Aaron Schweitzer

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