Your Investments: Watch out for the fiscal cliff

We may start reading headlines that talk about the US economy about to fall off a “fiscal cliff.”

US dollars 390 (photo credit: Thinkstock/Imagebank)
US dollars 390
(photo credit: Thinkstock/Imagebank)
As summer vacation winds down and investors head back to work, we may start reading headlines that talk about the US economy about to fall off a “fiscal cliff.” While politicians choose to use the Wile E. Coyote method for dealing with cliffs (i.e. if you don’t look down you won’t fall), their continued delay in making hard decisions could cause the US economy to slip into a deep recession in early 2013.
What is it?
According to the Fiscal Times, “The ‘fiscal cliff’ is what US Federal Reserve Board Chairman Ben S. Bernanke has called the many major fiscal events that could happen simultaneously at the close of 2012 and the dawning of 2013.
“The events include the expiration of the Bush-era tax cuts, the payroll tax cut and other important tax-relief provisions.
They also include the first installment of the $1.2 trillion across-the-board cuts of domestic and defense programs required under last summer’s bipartisan deficit reduction agreement. At the same time, lawmakers may have to raise the debt ceiling once again, potentially triggering another standoff in Congress.”
How bad could it get?
CNBC Anchorwomen Maria Bartiromo writes, “The ‘fiscal cliff’ is fast approaching.
But well before the January 2 deadline – when without a compromise every working American will get a tax hike and hundreds of billions of dollars in government spending programs will expire – the pink slips will be going out at many companies not sure their government contracts will continue.
“Leaders of defense, transportation and health-care companies will have to notify employees that their jobs will be cut because of the uncertainty in the next two months. This so-called ‘fiscal cliff’ has become the hot button issue from Wall Street to Main Street with good reason.
Once these programs expire, Americans will be faced with the biggest tax increase since World War II, with massive layoffs likely across the nation.
“Many economists say this would catapult the US economy back into a deep recession, and others forecast an even worse scenario – depression-like times.”
Is it disaster?
While many analysts are saying that this scenario would cause major harm to the US economy, and by default the global economy, there are those who think this may be just what the doctor ordered to start to get the US back on solid financial footing.
Ezra Klein writes in the Washington Post, “Some deficit hawks are also sanguine about the cliff. A report from the Carlyle Group argues that going over the cliff is actually preferable to extending these policies and increasing the long-term deficit.
This automatic deficit reduction package would largely solve near-to-medium term fiscal problems, the authors, Jason Thomas and David Marchick, argue.”
As we approach the US presidential election, more and more focus will be paid to this issue. Mitt Romney’s running mate Paul Ryan considers getting the US debt under control and controlling runaway spending of vital economic importance, and he should be able to keep voters – as well as the candidate’s attention – focused squarely on this issue.
Your portfolio
How will this impact your investment portfolio? Certainly a swift compromise will be a catalyst for stocks, but keep in mind that a year ago the market dropped over 11 percent in just 10 trading days as the threat of no interim deal increased.
Famed Goldman Sachs market strategist Abby Joseph Cohen, the eternal optimist, says that investors should be a bit nervous over the next few months.
Javier David of CNBC writes, “Cohen suggested that a ‘fear factor’ of a European debt meltdown – as well as the looming ‘fiscal cliff’ and economic weakness in the US – was beginning to retreat from market psychology as stocks continue to rally.
Still, investors were right to be worried about near-term policy risks.
“This is one of those times while where we are comfortable with the medium-to longer-term outlook, we... are looking at the shorter-term, and have some concerns primarily about the political situation not just in United States, but in Europe.”
Make sure to speak with your financial adviser to evaluate your portfolio in the face of this potential event.
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.