11/27/12 3:52 PM – Fiscal Cliff Negotiations and the Stock Market

The “fiscal cliff” drama continues with more drama than markets would like. As a reminder, the so-called fiscal cliff is the result of last summer’s largely failed debt ceiling negotiations in which a package of spending cuts and tax increases would automatically go into effect at the end of the year. The main tax hike would be ending the tax cuts from George Bush’s presidency. Spending cuts would be across the board. Still, remember in Washington-speak, a cut is simply a reduction in the amount of expected increase in funding for a program, so a cut is not always what you and I would call a cut, that is, a reduction in spending from the year before.

Economists have said that this package would cut US economic growth by 2-3% in 2013 and put growth below zero. I think they are over-stating the case. The term fiscal cliff is also unnecessarily emotionally loaded on the scary side. Letting it occur, as was the final plan last sumnmer, would be “irresponsible.” Oh, how short-term-oriented and averse to discipline is our group of representatives! Be careful about pointing fingers at them, though. They caught that disease from voters.

Some Republicans and some Democrats have tried to bring in Medicare and Social Security to the discussion – a seemingly rational move since entitlements account for 63% of all federal spending and are far and away the fastest growing. But, the opportunity to paint the opposition as cruel to the poor and aged is too much to resist and so most are avoiding that discussion, which so far has only amounted to raising the future Medicare eligibility age from 65 to 67, matching the full Social Security benefit age. There is also the problem that Obamacare really increases the costs of caring for seniors and that just makes the budget problem worse if nothing is done on reining in the growth in Medicare.

So, Pres. Obama is off on the campaign trail again to tout the Obama version of a fiscal cliff fix while Republican Sen. Mitchell rails against the president for leaving town while negotiations are underway. Meanwhile, Democratic Sen. Reid is predictably upset at Republicans. Sigh.

I don’t think the markets can keep moving up while these negotiations look as bleak as they do. And, since the deadline for legislation on this is Jan. 1, that gives about five weeks to get it done, less if before Christmas. It is still enough time that it is probably much too optimistic to expect anything in the next couple weeks.

Keep a close eye on the market, especially if you have positions with gains in a taxable account that you might want to sell in 2012 to get the lower capital gains tax than what we will likely see in 2013. I think a lower market for the next two weeks is much more likely than a higher market, regardless of economic reports.