Some fear stock market reaction to ‘cliff’ events

Lack of deal to ward off spending cuts, tax hikes may spark Wall Street sell-off.

WASHINGTON — Congress and the White House can significantly soften the initial impact of the “fiscal cliff” even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets’ reaction, which possibly could be a panicky selloff that triggers economic reversals worldwide.

The stock market’s unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff.

President Barack Obama’s re-election gives him a strong negotiating hand, as Republicans are increasingly acknowledging. And some Democrats are willing to let the Dec. 31 deadline pass, because a rash of broadbased tax hikes would pressure Republicans to give more ground in renewed deficit-reduction negotiations.

A chief fear for Obama’s supporters, however, is that Wall Street would be so disgusted or dismayed that stocks would plummet before lawmakers could prove their newfound willingness to mitigate the fiscal cliff’s harshest measures, including deep, acrossthe-board spending cuts that Defense Secretary At a campaign-style event in Michigan, President Barack Obama warned his listeners their taxes will rise Jan. 1 without action by the congress. White House Press Secretary Jay carney told reporters that‘the president believes that a deal is possible. It requires acceptance and acknowledgement in a concrete way by Republicans that the top 2 percent will see an increase in their rates.’ House SpeakerJohn Boehner’s office expressed frustration with the talks to date, a day after the Ohio Republican met with the president at the White House. ‘We continue to wait for the president to identify the spending cuts he’s willing to make as part of the “balanced”approach he promised the American people,’ a written statement said. Leon Panetta says could significantly damage the nation’s military posture.

Financial markets respond to emotion as well as to reason. If New Year’s headlines scream “Negotiations collapse,” an emotional sell-off could threaten the president’s hopes for continued economic recovery in his second term, even if Republicans receive most of the blame for the impasse.