The dome of the U.S. Capitol. File.(Photo: Carolyn Kaster, AP)
Despite the hype and hysteria over the fiscal cliff, it's unlikely
the stock market will suffer a hair-raising correction, at least in the
short term, if politicians can't agree on a deal.
don't avoid automatic tax hikes and government spending cuts by Dec. 31,
the stock market may suffer a drop of just 2% to 3%, some Wall Street
The reason investment strategists don't expect a
massive selloff is because they believe some sort of deal will come
early in the new year, limiting damage to the economy from any
short-term fiscal drag.
think the market comes under some pressure if nothing is done by Dec.
31," says Mark Luschini, chief investment strategist at Janney
Montgomery Scott. "It may not be more than a 3% correction ... The
longer it drags out, however, the greater the likelihood its impact will
start to show in economic data, which will then be counterproductive to
stocks as corporate profits are threatened."
To a certain degree, fiscal-cliff fears have been "overblown in the sense that it sounds so terminal," Luschini says.
the full force of any government spending cuts or tax hikes won't have a
major impact right away. The economy won't go into recession Jan. 1
barring an eleventh-hour deal. Automatic spending cuts of $1.2 trillion
will occur over a decade.
There's a consensus that if lawmakers
can agree on a deal by year-end or early in 2013, even one that simply
extends tax cuts for the middle-class, stocks will probably enjoy a
relief rally as some uncertainty fades.
The market's big test,
however, will come in the first quarter of 2013, when lawmakers are
forced to tackle the nation's mushrooming deficit.
tough decisions on tax policy and entitlement reform to put the nation's
finances on a more healthy, sustainable path, says Michael Pento,
president of Pento Portfolio Strategies. Pento also believes stocks
would suffer an initial drop of 2% to 3% if the U.S. goes over the
The next big obstacle for markets is likely to be a renewed
debate on the debt ceiling, which needs to be raised again early in
2013, Pento says. The Treasury Department said Wednesday that the U.S.
will hit the $16.4 trillion borrowing limit Dec. 31 but it can take
"extraordinary measures" to extend the government's borrowing ability
for another two months or so.
"The real fight will be over
spending cuts and raising the debt ceiling," says Pento. "If there is no
agreement to raise the borrowing limit of the U.S., we will see a panic
move lower (in stocks) in the area of 15% unless action is taken
The upside, of course, is if politicians can agree on a
mix of tax hikes and spending cuts that limit the amount of fiscal drag
and are perceived as market friendly, says Luschini.
will overcome it," he says. "I think the stability that will be brought
from a fiscal cliff resolution would lift business spending, and allow
job growth and spending to occur. Add the improving housing market and
we could well see growth accelerate as the year unfolds."