Eye on the Market I November 14, 2012 J.P.Morgan Topics: what's getting better and what's getting worse; US tax progressivity Brief market update. I get the sense that some people are disappointed that equity markets sold off recently. A little context is in order here. While global equities were up 15% YTD in early September, this is not the kind of year in which such returns should be expected. Anything in the neighborhood of 8%-10%, where they are hovering now, should be considered a victory given the headwinds in place. Such a result would still validate the strategy of sticking at or slightly below normal equity allocations. It might seem like a volatile year, but 13% (so far in 2012) is right on the long-term average. As we head into the US fiscal cliff saga, there are a wide range of potential outcomes. My best guess is that whether people like it or not, the President has gained leverage over House Republicans, evidence of which is seen in the Clintonesque statements from the latter about agreeing to raise tax revenues but not tax rates (through substantial reduction of deductions and exemptions applied to AGI > $250k). The President's opening bid this week was pretty high: $1.6 trillion in tax revenues raised over ten years mostly from the top two brackets, and also from businesses; we'll see where it goes from here. The upshot: if the bulk of the fiscal cliff is defused (from 4% of GDP to around 1%), US growth will not have as much of a headwind next year (good news), but the rating agencies will face the dilemma of whether to reflect this in its credit ratings of US debt (the potentially bad news). Anything more than 2% could risk throwing the US economy into reverse for a couple of quarters. A Star is Born. I began to work on our 2013 outlook this week, and was looking at some of the improving and deteriorating trends around the world. In doing so, I was reminded of A Star is Born, in which an aging alcoholic whose career is in a downwa