Cliff Averted! So What?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just moments after the last possible second, the almost always combative U.S. government came together to belatedly avoid the so-called fiscal cliff. While it's nice to see both sides compromising, the just-so-slightly-after-the-fact resolution doesn't really solve the country's ills. We've simply kicked the can down the road again.
The Unites States is still mired in a slow growth mode that leaves it on the edge of recession. Unemployment remains stubbornly high with little to suggest a notable change is in the cards. And the housing market, while showing signs of life, is still a far way from a full recovery. In fact, some suggest the current accord is likely to push the U.S. economy into a recession, while others see years of sub par market returns, including PIMCO's Bill Gross who just recently suggested that 2013 will see stock returns of just 5% or so.
Don't Get Too Excited
The markets, meanwhile, seems to see the largely bi-partisan accord as a reason to sound the all clear. Indeed, the days leading up to Dec. 31, which was the day we reached the edge of the fiscal cliff, saw the markets advance and decline based solely on the status of the government's negotiations. The day the deal was cleared to be sent on to the President, the market staged a material rally.
This exuberance totally misses the headwinds the country continues to face. This isn't to suggest that investors shouldn't be pleased, but that a broader perspective is in order. How notable is this event? The media has clearly latched onto it, but does it mean that Coca-Cola (NYSE: KO) is going to sell more soda starting on Jan. 3? No. Is Lockheed Martin (NYSE: LMT) going to avoid draconian budget cuts? Maybe, but that isn't yet a given. Is Paychex (NASDAQ: PAYX) going to see its business rebound and start to benefit from higher interest rates? No.
What I'm trying to suggest is that the fiscal cliff was more a media event than a turning point for the U.S. economy. The trajectory is still flat to lower and there are truly heavy items that still need to be lifted (like Social Security and health care) if that is going to change. So the outlook for most companies hasn't changed much, if at all.
For example, Coca-Cola is still a great company. A recession sparked by the fiscal cliff would have hurt results in the near term, but wouldn't have changed the fact that it's a great company. Selling flavored water has been and will continued to be fabulously profitable regardless of the fiscal cliff. Lockheed Martin, meanwhile, is also a great company with its fingers in just about every aspect of the military industrial complex. This deal may resolve some near-term concerns, and thus warrant a higher valuation in the market, but there is still a notable bias in Washington for cutting the military budget. That hasn't gone away and it's likely that, even with the cliff potentially averted, Lockheed is going to see cuts and have to make adjustments to its business. To be sure, Lockheed is likely to prosper over the long term, but avoiding the fiscal cliff isn't as much of a game changer as many may be hoping.
Paychex, and its larger cousin Automatic Data Processing (NASDAQ: ADP), are also still in the exact same spot they were on the last day of 2012. The economy is weak, unemployment is high, and interest rates are likely to remain low for years. While both companies are working to broaden their businesses in an attempt to spur growth, neither of these payroll processors will see a notable business turn until the economy picks up steam. That's particularly true for Paychex, which focuses on small and mid-sized enterprises.
So What's All The Hoopla About?
Averting the draconian cuts of the fiscal cliff was important, but, for the most part, an almost expected event. It would have been hard for any politician to run for office if this issue weren't resolved. That said, avoiding the steep drop of the cliff hasn't actually changed the course of the U.S. economy. Nor has it materially changed the positioning of most companies. There is still a lot to get done before the United States is back on a growth path. Until then, you should continue to examine companies from the ground up to ensure you don't get lulled into buying a business that still faces material head winds.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin. Motley Fool newsletter services recommend Automatic Data Processing, The Coca-Cola Company, and Paychex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!