Fiscal cliff now market's big worry

November 7, 2012

USA Today

Adam Shell

With the 2012 U.S. elections over, the focus on Wall Street will quickly shift to the other big uncertainty hanging over markets: the nation's still-unresolved fiscal crisis.

The main post-election stock market mover will center around the so-called fiscal cliff.

That term describes the more than $600 billion drag on the economy due to tax increases and government spending cuts slated to kick in on Jan. 1 unless the House and Senate act to avert it.

Democrats and Republicans, who have starkly different approaches to reducing the nation's ballooning deficit and jump-starting economic growth, must forge a compromise to limit the potential economic fallout, analysts say.

"It doesn't matter who's (in charge), both sides (of the political aisle) will have to deal with the cliff," says Linda Duessel, equity market strategist at Federated Investors.

Wall Street's message to the president and Congress is simple: Act now to get the USA's financial house in order.

"Tackling the fiscal cliff will be the first order of business," says Craig Johnson, a market strategist at Piper Jaffray.

"If we can get any sort of sign that the cliff will be avoided or minimized, it would lift another piece of uncertainty from the investment landscape," he says.

It would also give the stock market a much-needed booster shot of clarity, he adds, and put stocks back on track to make new all-time highs.

The stakes are high. If squabbling lawmakers can't agree on a fix, the economy will fall back into recession early next year, according to the Congressional Budget Office.

A recession spells doom for corporate earnings, stock prices and investor confidence, warns Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors. "The economy and market performance," he says, "hinges on the resolution of the fiscal cliff."

The lack of clarity related to tax policy, bank regulations and health care costs has basically put businesses and Wall Street investors in wait-and-see mode.

And a situation in which hiring decisions and expansion plans are frozen is holding back the economy, adds Piper Jaffray's Johnson.

"Investors are nervous about the market and don't want to feed it capital because they don't know what the rules of the road are going to be," he says.

"It's the same with employers. They won't hire if they don't know what taxes they will pay and what the cost of health care will be," Johnson adds.

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