International stocks have started to outperform U.S. stocks. "For the past two and a half years, the U.S. has been the safe port in the storm," says Russ Koesterich, global chief investment strategist for asset manager BlackRock. "Now the source of risk is the United States."
But stocks aren't the only market starting to tremble. In the commodity markets, oil prices have started to weaken, in part because of fears of weakened demand if the U.S. falls into a recession. The spot price of a barrel of West Texas Intermediate crude oil has fallen from $99 a barrel on Sept. 14 to about $86 now. Although some of that fall stems from increased supply -- the U.S. is now the fastest-growing non-OPEC oil producer -- some also stems from fears of an economic slowdown.
Other commodities are starting to show strain, too. Among the worst-performing S&P 500 sectors, for example: steel producers, down 4.5 percent the past three months. The S&P 500 diversified metals and mining index has plunged 17.5 percent.
Gold has rallied modestly in recent weeks but still remains well below its October highs. Gold's vacillation is partly because you can argue that gold will either rise or fall if the U.S. steps off the fiscal cliff. A recession tends to be deflationary -- bad news for the ultimate inflation hedge. But the Fed will have to step up its efforts to keep the economy going, and that could be inflationary in the long run.
Only the bond market shows little sign of wavering, and that, in part, is because Treasury bonds would benefit from a sharp contraction in the economy. In a big downturn, Treasuries are the ultimate haven in troubled times. Investors push Treasury prices up -- and yields down.
If Congress doesn't sort out the fiscal cliff by Dec. 31, investors will have precious few havens. Even Treasury securities are suspect, because a fiscal cliff debacle could result in the nation's credit rating getting downgraded again. Although the Treasury market shrugged off the last downgrade, it may not do so for the next.
'It's not like dodge ball'
S&P's Young offers two areas that might not get hit as badly as the rest of the market, although he cautions that all areas are vulnerable: "It's not like dodge ball," he says.
Health care. Everyone needs health care. S&P is predicting 10.1 percent earnings growth for the S&P 500 in 2013, assuming Congress doesn't push the market over the cliff. Young says the health care industry should weigh in at about 5.9 percent earnings growth. But the sector is cheap and predictable, and it might not get hurt as badly as others in a downturn.
Consumer discretionary. If you've been lusting after a new car, new clothes, or a few dinners out, you know that there's lots of pent-up consumer demand. Companies that cater to those whims should grow earnings about 15 percent next year, Young estimates. He likes the sector, even though it's pricey: "It's not cheap, but it's got the growth to justify it."
Koesterich thinks high-quality tax-free municipal bonds could also be a haven: Their interest is generally free from federal income taxes. A 10-year muni yields about 1.4 percent.
As the Dec. 31 deadline approaches, you can expect the market to get more skittish. While the markets represent the collective wisdom of its participants, it can also be dead wrong. After all, analysts widely attributed the stock market's run-up in October to the growing belief that Mitt Romney would win the presidential election.
And the fiscal cliff is not a single piece of crafted legislation that can simply be passed by a voice vote. Fixing the cliff would require amendments to five major bills, including the Affordable Care Act and the Budget Control Act of 2010.
Gundlach, for one, is skeptical that the U.S. will avoid the cliff. "I don't know if they can make a deal or not -- the story hasn't changed a tick from day to day," Gundlach says.
Perhaps the best to be hoped for is a few quick patches for the worst parts of the fiscal cliff -- the Alternative Minimum Tax, for example -- and an agreement for a more thoughtful discussion after the first of the year. "We can hope that cooler heads get locked in a room with no smoke, no mirrors, and that they find a way to credibly put the country on a path to lower debt over time," says U.S. Bank's Russell.
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