If the U.S. tumbles over the “fiscal cliff,” how bad will the damage be?
It could be huge. A few pundits are tossing their best guesses out there and speculating that a failure of the U.S. Congress and the Obama administration to reach a deal might vapourize stock values by way of a 1,000-point tumble on the Dow Jones industrial average.
“Time is quickly diminishing for a compromise, a compromise that all believe will still occur,” Kent Engelke, chief economic strategist at Capitol Securities Management Inc., said this morning in a note to clients. “I will argue because markets have not remotely discounted a possible stalemate, the Dow could lose 1,000 points in quick order if we do indeed go over the proverbial cliff.”
It’s hard to handicap the odds of no deal. Over the weekend, Republican House leader John Boehner signalled he’d be willing to allow higher taxes on über-earners making more than $1-million a year. That might be an opening gambit on the way to a deal.
Mr. Engelke says he expects the talks this week will “provide ample drama, drama that will probably extend into the Christmas week.”
He’s not the only one suggesting super-sized moves. The Wall Street Journal quoted money manager Hank Smith, chief investment officer at Haverford Trust, on Sunday saying the market could easily move up or down 1,000 points, depending on the outcome of the cliff talks.
As always if there are big stock moves based on politics, a tumble might have a silver lining for investors wanting to buy. A drop of 1,000 points, or about 7.5 per cent, would allow nimble players to pick up good stocks on the cheap -- provided of course that all the tax increases and spending cuts don’t lead to a recession.