Big Ben Warns of Fiscal Cliff (SPY, IWM, XRT, GLD, VTI)

The Chairman goes to Capitol Hill and warns Congress of fiscal cliff.

Like the old college Prof that he is, Dr. Bernanke lectured House and Senate financial committee members for two days about the importance of eliminating the “primary deficit” within the next ten to fifteen years and to get spending and revenues to an equal number which then could set the stage to reduce the debt to GDP ratio.

He said that risks to the recovery remain, particularly Europe and oil prices, and that price shocks are bad for individual households and the general economy.  Housing is still in trouble and he's hoping for price stabilization in the market.

He said that 2 1/2 million jobs have been created since the onset of QE2, the stock market made big gains, credit markets are better and inflation remains at 2% and so the environment is more stable as a result of QE2 and “Operation Twist.”

But his sternest words regarded the future of the United States when he said we are on “an unsustainable fiscal path” that will lead to a “fiscal and financial crisis.”  The combination of the expiration of the Bush tax cut, the payroll tax cut and extended unemployment benefits plus the implementation of massive spending cuts to the Federal Budget pose a significant risk to economic growth, a fiscal cliff.

Reuters reported, “Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.”

Reuters

ETF Summary:

Major ETFs reacting to the testimony:

SPDR S&P 500 ETF SPY +0.6% at Thursday's close, the ETF tracks the S&P 500 Index and is the largest ETF in the world.

iShares Russell 2000 Index IWM closing +0.6% at the close, the ETF tracks the performance of the Russell 2000 Index of 2,000 small capitalization companies in the United States.

SPDR S&P Retail ETF XRT +1.2% up at the close.  This ETF tracks the retail sector of the S&P 500 in industries like apparel, automotive and food.

SPDR Gold Trust GLD gained 1.47% at the close to recoup some of the losses sustained in yesterday's massive sell off.

Vanguard Total Stock Market ETF VTI up + 0.78%, tracks the performance of the MSCI U.S. Broad Market Index which encompasses more than 99% of the total U.S. market capitalization of U.S. common stock.

Bottom line: Dr. Bernanke continues moving markets with more influence and force than any economic report and appears relatively satisfied with current conditions while concerned about the future fiscal path of the country.  More than ever, “don't fight the Fed” seems like an appropriate strategy for today's environment.

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