You’ve heard the predictions for what happens if the country goes over the “fiscal cliff”: The economy will shrink, nervous consumers will stop spending, and the stock market will plunge.
But those doomsday predictions are overblown, some professional investors say.
Even if Congress and the White House can’t reach a deal, the higher taxes and lower government spending that would follow would kick in only gradually. A recession is not guaranteed.
Whatever happens, the “fiscal cliff” — sweeping tax increases and government spending cuts set to take effect Jan. 1 — is going to dominate the headlines and the market for the next week.
The Associated Press posed a few big questions to investing experts.
Q: What’s going to happen in the stock market between now and the budget deadline of Dec. 31?
The market hates uncertainty. If there’s no deal next week, expect stocks to fall.
“We always knew we were going to get some volatility here,” says Scott Carmack, co-portfolio manager at Leader Capital in Portland, Ore. “Depending on leaders in Washington to come to some kind of agreement is like pulling teeth.”
Q: What about after Jan. 1?
Deal or no deal, many investors don’t expect the effects of the “fiscal cliff” to linger in the stock market for too long. One big reason is that everyone has seen it coming for months.
“We’re not overly concerned,” says David Hefty, CEO of Hefty Wealth Partners in Auburn, Ind. “The thing to keep in mind is that what hurts investors, what hurts the market, are things that are unexpected.”
Q: What if there’s no deal?
The impact of higher taxes and lower government spending would be felt only gradually, and Congress could always repeal them later, which is why many analysts don’t expect panic.
“The fiscal cliff is not really a cliff — it’s more like a $600 billion hill that will accrue over the year,” Carmack says, referring to the amount of money that could be taken out of the economy from higher taxes and lower spending.
Q: If there is a deal on time, will the market shoot higher?
Not necessarily. Stocks have been rising more or less steadily since mid-November, a sign investors already believed lawmakers would compromise. The Standard & Poor’s 500 index has climbed more than 5 percent since Nov. 15.
That signals that a successful compromise is factored into stock prices already. Much more important to the market’s performance in 2013 is the economy.
Some investors, like Bob Phillips, managing partner at Spectrum Management Group in Indianapolis, are pessimistic, pointing to an unemployment rate that is still much too high and personal income growth outpaced by inflation.
Tim Biggam, market strategist at the brokerage TradingBlock in Chicago, says other world economic problems that have faded from the headlines, like the European debt crisis, could roar back.
“It’s kind of a false sense of security,” he says, “to have the ‘fiscal cliff’ put everything to the back burner.”
Concerns about the U.S. government budget won’t be wrapped up by a “cliff” compromise, either.
“Even if they come up with a near-term budget agreement, it will not be enough to solve many of the fiscal imbalances,” said Mike McGarr, a Portland, Ore.-based co-manager of Becker Value Equity mutual fund. He predicts that stock market returns for 2013 could be “pretty muted.”
But others, including Hefty and Carmack, were more confident, pointing out that the housing market is improving, consumer confidence is rising and the unemployment rate is falling.
“I’m pretty optimistic,” Saut says. “Not cautiously optimistic — I’m pretty optimistic.”
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