The fiscal cliff, which refers to the package of tax increases and spending cuts that are scheduled to go into effect at the end of the year, has the potential to send the economy into a recession.
The markets celebrated President Obama’s re-election with a quick drop, as investors seemed to shift their focus to re-emerging debt problems in Europe and the fiscal cliff here in the U.S. The major newspapers, including the Wall Street Journal and the New York Times, put stories on the looming fiscal crisis front and center. It’s not surprising that these headlines — and the recent market movement — have created a sense of uneasiness. But let’s step back and take a closer look at the current situation and what it may mean for you.
A bumpy road
The market dip on Nov. 7 was significant; it was the largest decline of the year for the Dow Jones Industrial Average in both points and percentage, and it took the market below psychologically significant breakpoints — 13,000 for the Dow and 1,400 for the S&P 500 Index. Now that we are past the election, the market is focusing on the next set of challenges — and it doesn’t seem to like what it sees.
The fiscal cliff, which refers to the package of tax increases and spending cuts that are scheduled to go into effect at the end of the year, has the potential to send the economy into a recession. Compounding the matter is the fact that the White House and Congress have to come to some agreement to prevent us from going over the fiscal cliff. Unfortunately, the last time they tried to do this — during last year’s debt ceiling debacle — they couldn’t agree, and Congress cut a deal on its own, more or less. The stakes are just as high today, and the players are the same.
Cause for compromise
The good news is there are more incentives to cut a deal this time. Last time, both sides were reluctant to give the other an advantage going into the presidential election; this time, it’s not an issue. Last time, some Republicans believed that there wouldn’t be a problem if they failed to reach an agreement; this time, it’s pretty clear that we will be facing a recession if they don’t agree. Last time, the participants were dealing with these types of issues, in many cases, for the first time; this time, most of them have been down this road before. Finally, last time, the Republicans were coming off a victorious election; this time, both sides have been chastened somewhat, potentially increasing their willingness to compromise.
That said, negotiations may not be easy or quick. Politically, there is no advantage to an early deal for either side, which means we may see a lot of decision-making at the 11th hour. Unfortunately, the negotiations are likely to play out in the press, as each side grandstands and postures to pressure the other. This can lead to a lot of emotion-based selling in the market — which means it’s even more important to maintain your perspective and stick to your long-term action plan.
Expect uncertainty ... for now
With all of that, expect to see more uncertainty and market volatility until, and even if, a deal is cut. Right now, the focus is on what might happen, but we will probably see both up and down shocks as the press reports of the negotiations progress.
There is cause for concern, yes, but the reality is that no politician wants to see a dramatic recession. The thing to keep in mind is that this discussion has to take place, and no matter how rocky the road, the resolution will put us in a better place as we move into the future.
Kevin Dick is a financial adviser located at Kevin Dick Investment Management Group, 715 S. Beeline Highway, Suite A. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network. He can be reached at (928) 474-4350 or at firstname.lastname@example.org.