U.S. stocks join worldwide 'cliff' selloff

Stocks fell Friday as worries about the U.S. fiscal cliff weighed on world markets.

Shortly after the open in New York, the Dow Jones industrial average and S&P 500 index were down 1%, the Nasdaq composite index wa off 1.7%.

MORE: Boehner: We're still working on fiscal cliff

Republicans failed Thursday night to pass their Plan B emergency fix, and if Congress doesn't act by Dec. 31, taxes will rise and spending will be slashed.

Economists say the full force of those changes in 2013 could send the nation back into recession.

In Europe, Germany's Dax 30 was off 0.8%. Tokyo's Nikkei stock index finished down 0.99%.

House speaker John Boehner said there were not enough votes to pass Plan B, which would have returned taxes to Clinton-era rates for those earning $1 million or more and left tax cuts in place for all other taxpayers.

He sent the House home for Christmas, leaving the state of negotiations on the fiscal cliff in doubt.

Strategists say the best thing for investors to do now is hold tight. "The real economy is presenting good data," says Steven Wood, chief market strategist for Russell Investments.

Brave and optimistic investors should use fiscal cliff declines to buy stocks, says Jason Moser of The Motley Fool. "The bottom line for long-term investors is that these headline driven events can produce unique opportunities to buy major quality companies at excellent prices in relation to their long-term earnings power," he says.

Wood notes that companies trimmed spending and hiring plans in the summer, and that means the first half of 2013 will likely be one of slow growth for the economy. "A lot of hiring has been postponed to the second half of 2013," Wood says."We expect a soft first quarter, accelerating in the third quarter of 2013."

Wall Street had been betting that some deal would be hammered out by year-end, so stocks could sell off if that expectation is not met.

Fiscal cliff fears pushed 10-year Treasury note yields lower, to 1.76%, and the dollar higher, as investors sought safe havens. Bond yields fall when prices rise.

Oil prices fell.

Today could be particularly volatile because it's a quadruple witching day: the expiration date for stock market index futures, stock market index options, stock options, and individual stock futures.

Some worries about the fiscal cliff have been baked into stock prices, says Mark Hanna, manager of Paladin Long Short fund. But, he says, "Last night's inability for Boehner to show he has his own party's backing calls into question any ability to get the deal done before year end." And, he says, " this shifts some power to the Democrats, which the market would generally view as unfavorable especially in questions to dividend and capital gain taxes."

Political uncertainty has been blamed already for creating a high level of uncertainty for CEOs, who have been reluctant to invest in their businesses and hire workers because they don't have clarity on what taxes will be, what their health care costs will be, and what regulations their companies will face until lawmakers agree on a plan to fix the nation's fiscal problems.

"Politics overshadow economics," is the way Barclays summed up the market's reaction to the latest breakdown in the fiscal cliff talks.

Nearly all Americans would be affected by the fiscal cliff:

• Defense and non-defense spending would each be cut $55 billion.

• Tax rates would rise to 2000 levels, putting the top tax rate at 39.6%, vs. 35% now.

• The two-percentage-point cut in the payroll tax rate would end.

• Taxes on dividends would return to ordinary income tax rates - meaning a hike to as much as 39.6% from 15% now.

• Taxes on long-term capital gains would rise from 15% now to 20%.

• Thresholds for the alternative minimum tax, designed to ensure wealthy taxpapers pay some tax, would return to 2000 levels, raising taxes on about 30 million taxpayers.

USA Today