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Afraid of the fiscal cliff? Don’t be Add to ...

I’ve seen a number of polls – here and here, for two examples – that suggest the No. 1 concern among investors right now is the fiscal cliff. It certainly sounds scary: Without an agreement in Washington on a budget by the end of the year, the U.S. economy will be jolted by automatic tax increases and spending cuts, severe enough to push the economy into recession.

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The “cliff” metaphor implies that these changes will be introduced in one fell swoop, but that’s not the case; the changes would start in the New Year, giving Democrats and Republicans time in January to continue their wrangling without seeing any severe pressure on the economy.

Indeed, for all the apparent fretting by investors, there is relatively little panic among market watchers. Eddy Elfenbein pointed out that the iShares Dow Jones aerospace and defense exchange traded fund – presumably with a lot to lose should defence spending get clobbered without a budget agreement – has been leading the market. And the CBOE volatility index, or VIX – a popular fear gauge – continues to coast close to five-year lows, suggesting little fear.

“Let me be clear: The threat from the fiscal cliff is greatly, hugely and fantastically exaggerated. It’s almost reached comical levels,” Mr. Elfenbein said. “Of course, if we really were to go over the cliff, that would be bad news – and that’s precisely why it won’t happen.”

Here is some other recent coverage on the fiscal cliff, and why it might not be such a fearsome thing.

Calculated Risk, who argues that the fiscal cliff is more accurately described as the austerity slope: “My guess is an agreement will be reached in early January, and Federal austerity will subtract 1 per cent to 1.5 per cent from GDP in 2013. Note: There is no drop dead date – despite the silly countdown timers on some sites.”

Paul Dales, Capital Economics, in explaining the drop in the November reading of the ISM manufacturing index: “As such, the fiscal cliff may well be the culprit. Admittedly, we don’t really know for sure. But if it is due to the cliff, a deal would trigger a bounce-back in the coming months.”

Ed Yardeni, Yardeni Research: “I’m not convinced that stock prices will go over a cliff if there is no deal by the end of this year. After all, there’s always next year to haggle some more!”

Follow on Twitter: @dberman_ROB

 
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