If you have not already heard reference to the “fiscal cliff” you probably soon will. We feel it is important for our clients to have knowledge of what this refers to and how SYM Financial is approaching this potential economic event.
The fiscal cliff refers to a number of specific tax cuts and benefits due to expire by the end of this year and early next year. The tax cuts and benefits pertaining to the fiscal cliff are as follows: late in 2012 the debt limit is expected to be reached, on 12/31/12 the Bush tax cuts expire along with the extended unemployment insurance benefit, the payroll tax holiday and the alternative minimum tax patch “AMT”. In January of 2013 the “sequester” occurs which is a series of across the board spending and budget cuts. Also, the Medicare tax will increase in January of 2013. The United States’ economy could shrink as much as 4 percentage points by some estimates in the first half of 2013 if Congress fails to address the expiration of $600 billion worth of tax breaks and jobless benefits by the end of this year.
The consequences of no action or endlessly delayed action could likely have investors, consumers and business owners adjust their behavior in advance of this significant economic timing of events.
One of our respected fund managers has been monitoring the use of the term “fiscal cliff” in news stories under the premise that negative news can create a vicious cycle in the media:
As promised we have been monitoring the use of the term "Fiscal Cliff" to see if it reaches the level that could be termed obsessive. It appears we are well on our way to such an outcome, with the week ending August 3rd seeing a record 512 mentions.
To put this in perspective, use of the term "debt ceiling" topped out 4182 articles on week ending July 29th 2011, while the term "LIBOR" popped up in over 1000 articles in October 2008 and 993 articles on the week ending July 20th (interest has since rapidly receded to 534 articles).
A level of 512 articles suggests that this has become a major topic of conversation but not yet a truly dominant one. On the other hand we still have three months to go to the election and over four months until the "cliff face" will actually have been reached. We would therefore expect substantially higher readings in the weeks ahead.
As investors, we will always have a “wall of worry” to climb. There is no “safe” time to invest. It is possible that economic growth could surprise us and begin to make a dent in our debt issues. Higher taxes might not be the impediment. We’ve had significantly higher income tax rates in the past that did not impair economic growth. We have increased both Social Security and Medicare taxes in the past. We by no means intend to trivialize the issue of the fiscal cliff in the US as this could likely be a key ingredient for volatility in the markets this fall.
We currently have a stock market valued at low levels based on historical data. Investors worldwide have moved significant amounts to bonds resulting in very low yields. It is possible that much of what many investors fear, Europe and our fiscal cliff, has been mostly discounted by the equity and bond markets.
All of these current worries are real and should be seriously considered by investors with investment time frames of less than five years since volatility in prices is a given in any long term investment program.