If you have not yet heard about the “Fiscal Cliff” in the press, you must have been taking a wonderful vacation on a secluded island. I envy you.
If you have heard about it, get ready to hear more and more for the rest of the year.
Why? Well, that’s when a whole lot of tax breaks and spending programs will expire. The worry is that it will impact the growth of our economy at a time when it is still very fragile. I’ve seen reports that say the impact could be around $500 billion, which equates to about a 4 percent hit to GDP.
There are four major components that most people are referring to when they mention the Fiscal Cliff. They are, in no particular order, the end of the 2 percent payroll tax holiday, the end of the extended unemployment benefits package, the automatic budget and spending cuts that are a result of the Budget Control Act, and the end of the Bush-era tax cuts.
The worst case scenario is that we see no action by the politicians and we go into 2013 staring a recession right in the face. I don’t think that our economy can handle a $500 billion hit right now. But I’m not sure this scenario has a high probability of playing out—despite my cynicism about Washington. There is too much at stake, and I’m a believer in survival instincts and self-preservation.
We are heading into a huge election season. The White House, the House, and the Senate are all in play. At a time when approval ratings are low, no elected official will want to enrage the voters more than they already are with any sort of inaction on his or her part. Let’s call it the power of political “common ground.”
So, the most likely scenario is one where our elected officials figure out a way to push this problem into 2013 and beyond. The elections will be over and the political landscape will be set for a couple more years. By extending this problem, at least it will be fought on a battleground that everyone can clearly see.
However, as we progress further and further towards the end of the year with no action taken to fix this, the markets will experience some angst.
The opportunity? I’m thinking any drawdown in the market over this issue will present a good opportunity to buy, because let’s face it, after four years of economic malaise, no one is dumb enough to drive this car off the cliff.
David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management, a full-service wealth management firm in Alexandria, Va. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance references are historical and are not a guarantee of future results.