INCLINE VILLAGE, Nev. - The political commercials and polling phone calls are over (thank goodness!) so investors will turn their attention to the fiscal cliff. Unless congress acts, on January 1 taxes will increase at the same time that spending cuts agreed upon as part of the debt ceiling deal of 2011 take effect. The economy will take a one-two punch. Will the stock market?
The effects of inaction regarding the fiscal cliff are well known. We'd see a recession next year amid a fall in capital spending. Investors would invest less, take fewer risks and hunker down, much as they are now except even more so. Government would raise a bit more money from taxes on income, dividends, capital gains and interest, but there would be less of all those to tax. Unemployment would rise. Standards of living would fall. The federal deficit would still be more than one trillion dollars. Not surprisingly, the polls show that a huge percentage of Americans expect a deal to be struck no later than January or at least an agreement to keep everything as it is for another six months so wide-sweeping tax reform can be worked out. I agree. Could politicians be so stupid as to willingly push us into a recession due to the fiscal cliff they crafted? Many would say yes. I disagree (I think).
While the media are sounding the alarm about the fiscal cliff, and rightly so, people seem indifferent, at least for now. Consumer sentiment is on the rise and retail sales rose 1.1 percent in September, the third straight monthly gain. Confidence is at a five-year high. Housing starts rose 15 percent last month and building permits were up 12 percent. People are dining out more often and buying smart phones and electronics. Perhaps Christmas sales will also surprise the skeptics. CEOs, however, aren't as optimistic. They can't be optimistic, given the uncertainties of federal finances and tax rates.
The fiscal cliff's impact on the economy will be gradual at first, then quickly grow. It will then force businesses to hunker down, invest less and put off hiring. Stock investors will pay a price, too, as they always do early in a recession. While time is running out, this man-made crisis can still be averted. It's up to congress now (gulp!).
- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.