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"Fiscal Cliff" or "Dip in Road:" What Will the New Year Bring?

For those who have followed my columns in this space, I have tried to keep you well informed on most major economic hurdles and pitfalls in recent months. Last month, I outlined the meaning of the “fiscal cliff” syndrome. With the presidential election behind us, I want to give my opinion on what the Congress may or may not do in the coming weeks.

Before the election, all of Congress was fully aware of the major laws and tax code provisions which are due to expire or change significantly on December 31, 2012. Unfortunately there was not much discussion of these important economic facts during the electoral debates which clearly would have heightened the average person’s awareness to the severity of the subject.

With the election behind us, let’s turn our attention to where we’re at today.

If you review last month’s column briefly, you will see the list of items that comprise the “fiscal cliff” syndrome. Failure to deal with any one of the items could eventually cause great financial strain, and in my opinion could flip us into a double dip recession. The operative word here is eventually, as most of the fiscal cliff items kick in over time and can be dealt with after January 1, 2013. It is the potential serious impact that has so many scrambling to get something done. However, what may in fact be the case is that even a temporary extension of the status quo would be better than not coming to any terms at all.

If no compromise is reached, all tax rates return to the pre George W. Bush era levels and major “automatic cuts” will hit in various entitlement programs including Medicare; the defense budget will also take an immediate sizeable hit. Paychecks will shrink immediately, as the pre tax-cut era withholding rates will be reinstated. In response, I expect the democrats will immediately return in January and implement tax cuts for Americans earning under $250,000, and reinstate the Medicare benefit cuts. How can they accomplish this? I think it’s unlikely that any politician will vote against a tax cut for any of his constituents, so this is a strategy that will let the tax cuts for everyone expire and then be reinstated for only some Americans.

Timing is everything, and speculation being what it is, the “fiscal cliff” could amount to nothing more than a “dip in road”. The worst outcome of there being no agreement by year-end is that it sends a very bad signal to business decision makers, strategic planners, and our global trading partners, many of whom are dealing with their own fiscal cliffs at the same time. Stock markets have been racing both directions on any news or lack thereof, and many corporations have moved their dividend payment dates up to December 31, 2012 to insure those distributions receive the current favorable tax treatment.

Thoughts from your Credit Union...
Peter Lynch once said that there is little correlation between short term stock price movement vs. corporate revenues and profits. Over the long term, there is 100% correlation. Mr. Lynch also said that people spend more time picking out a refrigerator or planning a summer vacation than they do reviewing their investments.

Whatever happens over the short term with respect to taxes and budget cuts, over time it will be another chapter in our history books and market prices will reflect the growth of our economy and the underlying companies that support it. The most prudent approach to enjoying the quality of life you’ve earned is to match your personal asset allocation with your risk tolerance.

We’re always here if you have any questions or concerns that you would like to discuss. The experienced CFS Financial Advisors* at BCU have a wealth of knowledge and resources to help you manage your current investments and navigate your best options for the future. To schedule a free, no-obligation financial consultation contact 800-388-7000 ext. 8700.


 

Related Articles:

The “Fiscal Cliff”

Q&A: The US fiscal cliff

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©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

*Non-deposit investment products and services offered through CUSO Financial Services, L.P. (“CFS”, a registered broker-dealer (Member FINRA/SIPC) SEC and Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. BCU has contracted with CFS to make non-deposit investment products and services available to Credit Union members. BCU Investment Advisors is a trade name for the investment services available at BCU.