Is ‘cliff’ just a blip for Wall Street?

In­vest­ing ex­perts share their ex­pec­ta­tions for stocks whether there’s a deal or no deal.

Austin American-Statesman - - BUSINESS - By Christina Rexrode

NEW YORK — You’ve heard the pre­dic­tions for what hap­pens if the coun­try goes over the “fis­cal cliff”: The econ­omy will shrink, ner­vous con­sumers will stop spend­ing, and the stock mar­ket will plunge.

But those dooms­day pre­dic­tions are overblown, some pro­fes­sional in­vestors say.

Even if Congress and the White House can’t reach a deal, the higher taxes and lower government spend­ing that would fol­low would kick in only grad­u­ally. A re­ces­sion is not guar­an­teed.

What’s much more im­por­tant to the stock mar­ket, the ex­perts say, are eco­nomic fun­da­men­tals.

“His­tory has shown that the econ­omy is go­ing to do what the econ­omy is go­ing to do,” said Scott Car­mack, co-port- fo­lio man­ager at Leader Cap­i­tal in Port­land, Ore. “And pol­i­tics don’t cre­ate some sort of dis­as­ter.”

What­ever hap­pens, the “fis­cal cliff” — sweep­ing tax in­creases and government spend­ing cuts that take ef­fect Jan. 1 — is go­ing to dom­i­nate the head­lines and the mar­ket for the next week.

The As­so­ci­ated Press posed a few big ques­tions to in­vest­ing ex­perts.

What’s go­ing to hap­pen in the stock mar­ket be­tween now and the bud­get dead­line of Dec. 31?

The mar­ket hates un­cer­tainty. If there’s no deal next week, ex­pect stocks to fall.

“We al­ways knew we were go­ing to get some volatil­ity here,” Car­mack says. “De­pend­ing on lead­ers in Washington to come to some kind of agree­ment is like pulling teeth.”

Be­sides, there are other in­cen­tives for peo­ple to pull money out of the mar­ket. Some pro­fes­sional in­vestors are sell­ing to lock in gains for the year. Oth­ers are sell­ing be­cause in­vest­ments could be taxed at higher rates next year.

“It’s been a pretty good year in the mar­ket,” said Peter Tuz, co-man­ager of the Chase Growth and Chase Mid Cap Growth mu­tual funds in Char­lottesville, Va. The Stan­dard & Poor’s 500 in­dex is up more than 13 per­cent in 2012.

“Peo­ple might look at that un­cer­tainty and say, ‘I’m happy with that, and now I’ll take some money aside, and sell,’” he said.

What about af­ter Jan. 1?

Deal or no deal, many in­vestors don’t ex­pect the ef­fects of the “fis­cal cliff” to linger in the stock mar­ket for too long. One big rea­son is that ev­ery­one has seen it coming for months.

“We’re not overly con­cerned,” said David Hefty, CEO of Hefty Wealth Part­ners in Auburn, Ind. “The thing to keep in mind is that what hurts in­vestors, what hurts the mar­ket, are things that are un­ex­pected.”

He adds: “Ev­ery­body has 2008 burned into their minds. They think the fis­cal cliff will be the next 2008 event. A 2008 event is when no­body sees it coming, and ev­ery­one is blind­sided. No­body’s go­ing to be blind­sided by this.”

Hefty says he’ll watch whether the Fed­eral Re­serve con­tin­ues its pol­icy of pump­ing money into the econ­omy, and fun­da­men­tals like hous­ing and un­em­ploy­ment, to de­cide how to in­vest in 2013.

“We’re look­ing at two key things that mat­ter the most,” he said. “The ‘fis­cal cliff’ isn’t one of them.”

Don­ald Quigley, co-man­ager of the Ar­tio To­tal Re­turn Bond mu­tual fund, is more wary of the “cliff” for its po­lit­i­cal im­pact than its eco­nomic im­pact. If Repub­li­cans and Democrats can’t com­pro­mise, he says, the world could take that as a sign that the U.S. government is dys­func­tional.

“It ba­si­cally says, ‘We really don’t have our act to­gether,’” Quigley said. “To have to ad­mit that your coun­try is un­govern­able is not the best way to run a coun­try.”

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