Fiscal Cliff Uncertainty

Weekly Update December 10, 2012

Markets experienced another choppy week, disturbed by ongoing fiscal cliff debates and lackluster economic data. Equities finished the week mixed, with the S&P gaining 0.13%, the Dow gaining 0.99%, and the Nasdaq losing -1.1%.[i]

After another week of back and forth between Democrats and Republicans, no fiscal cliff resolution is in sight. Despite offers on the table from both parties, the debate remains stalled on the issue of higher taxes for the wealthy. Although both sides are exchanging accusations of brinkmanship, multiple polls suggest that Americans will blame Republicans should politicians fail to reach a deal.[ii] It appears as though President Obama and Congressional Democrats are content to stall the clock in the hopes of pushing Republicans into grudging agreement with their plan to raise taxes on the wealthiest Americans (Those earning $250,000.00 or more per year).

Although we have been talking about the fiscal cliff with our clients for many months, the media is making up for its lateness to the issue with hysteria. In truth, the fiscal cliff deadline isn’t December 31 st, it’s actually much sooner.[iii] According to the rules in the House of Representatives, the last day any bill can be submitted for consideration is December 18th since Congress will adjourn for the year on December 21st, and they need at least three days to deliberate. However, since President Obama may be leaving on December 17th for his annual family vacation to Hawaii, next Monday might be the last possible date for a fiscal cliff resolution.[iv]

At this point, it seems unlikely that lawmakers will be able to hash out a compromise in the week we have left. While a lack of a resolution means we probably won’t see a year-end market rally, regardless of whether a deal is reached or not, the economy won’t suddenly stop on January 1st. It will take time for the full effects of tax increases and budget cuts to kick in, giving lawmakers further time to come to a resolution.


Looking ahead, we have the year’s final Federal Reserve FOMC meeting this week; analysts don’t expect interest rate targets to change. However, many will be closely watching the 4th quarter growth forecast, which Fed economists will announce before Bernanke speaks.

Whatever the remaining weeks of the year have in store, I’ll be monitoring the situation and will keep you up to date.

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