Fiscal Cliff Hanging Over Investors

From Main Street to Wall Street, there’s a lot of discussion about the pending “fiscal cliff”, along with speculation about what it may mean for the U.S. economy. In fact, one survey found that 33% of Americans are following news of the fiscal cliff very closely.(1)

Late night comedian David Letterman recently joked, “Everybody is talking about the fiscal cliff. And I’d be talking about the fiscal cliff too, if I knew what the [heck] it was.”(2)

National attention has been drawn to the conversation because the mere words “fiscal cliff” conjure up the notion that the U.S. economy may be headed for a sure and sudden nose dive. But is it really a fiscal cliff or more of a “fiscal slope”? Will there be a short-term fix or a drawn-out
struggle? And is the fiscal cliff just a catchy Beltway term that should have little influence on your investments?

A Look Back
The phrase “fiscal cliff” refers to federal spending cuts and federal tax increases that will automatically take effect on January 1, 2013. If Congress takes no action, the higher federal tax rates are projected to increase tax revenue in 2013 and beyond, while federal spending is mandated to fall for the next several years.

The Tax Policy Center has estimated federal tax collections will increase $500 billion in 2013 as a result of the new federal tax rules.(3) The Congressional Budget office has projected that real GDP will be 0.5% in 2013, weighed down by a slow first half of the year, with economic activity
picking up in the third and fourth quarters.(4)

In order to sidestep the cliff, President Obama and Congressional leaders will have to compromise on a wide range of issues. These include reductions in defense and non-defense spending, deciding whether to extend the Bush tax cuts, whether to raise the payroll tax, and how to deal with extended unemployment benefits and reimbursement cuts to Medicare doctors.(5)

With the world watching, the White House and Congress are expected to act quickly to resolve the uncertainty about the country’s fiscal future. If Congress and the White House agree on a deal in early 2013, lawmakers could retroactively restore the prior tax rates and approve additional federal spending.

A Mixed Response
The stock market has given mixed signals since the fiscal cliff came into focus following the presidential election. The Standard & Poor’s 500 stock index fell 5% between November 1 and November 15, but then rallied back to finish November 28 at a number just below its November 1 close. (6)

The November market volatility didn’t appear to interrupt American’s shopping plans. A record 239 million people went shopping either in stores or online over the Black Friday weekend. That’s up 9.2% over the same period in 2011. On average, shoppers spent $423, up slightly from $398 in 2011.(7)

As seasoned investors know, financial markets can rise and fall with the latest cover story, whether from Washington or abroad. The best approach may be to keep your eyes fixed on your destination and not get sidetracked on day-to-day market fluctuations.

Your investments should reflect your financial goals, time horizon, and risk tolerance. And remember: when uncertainty grips the markets, it may be a great time to take advantage of new opportunities, rather than overreact to short-term events.

1. Pew Research Center, November 19, 2012
2., November 8, 2012
3. Tax Policy Center, November 29, 2012
4. Congressional Budget Office, May 2012
5. CNN Money November 9, 2012
6. Yahoo Finance, November 28, 2012. The S&P 500 Composite index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
7., November 27, 2012

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Faulkner Media Group to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2012 Faulkner Media Group.