The market really can't get out of it's own way right now. Given Apple's overwhelming dominance of the stock market we can't overlook the $150 Billion (yes, that's billion with a B) drop in the market value of Apple in the past 2 months. Apple is now being thumped over the head with two old fashioned market rules "reversion to the mean" and "all stocks eventually discover gravity".
The talking heads remain obsessed with the fiscal cliff talk and it is a convenient boogie man for a down market.
Let's review what we're talking about when we talk about the worst cast scenario:
Spending cuts (less than 1% of GDP)
* $87 billion in across the board cuts
* $35 billion - expiration of extended unemployment benefits
* $15 billion - reduced Medicare Dr. payments
New taxes (about 3% of GDP)
* $24 billion new taxes
* $87 billion other taxes that expire
* $127 billion payroll tax holidays
* $295 billion tax rates return to 2001 levels and AMT
As a reminder the impact of fiscal cliff would be a short-term negative and a long-term positive. If we do nothing our ratio of debt held by the public to GDP will rise from it's current 67% to 90% by 2022. In contrast, if the fiscal cliff changes are implemented the CBO projects that our debt to GDP would actually FALL to 58% by 2022!! However, the impact on growth in the near-term would be meaningful and would likely take us back into recession in 2013.
Having said all of that ,look at those cuts and taxes again -- which ones can you see Congress having the guts to defend?
I suspect we'll see something around $20 billion of unspecified "spending cuts" vs the original $137 billion estimate. On the tax side I expect another extension of the payroll tax holiday, a deal on AMT and no change in rates for people earning $1 million or less. So, instead of $500 billion in new taxes collected, I'm going to estimate that roughly $50-$75 billion in new taxes will make it's way to the treasury.
Net/net, our long-term fiscal problems will get worse and we will have created a great deal of uncertainty fretting over this issue.