A sign is seen outside the New York Stock Exchange.(Photo: Stan Honda, AFP/Getty Images)
NEW YORK -- Now that the 2012 U.S. election is over, removing one of
the major sources of uncertainty for financial markets, the focus on
Wall Street will quickly shift to the other big uncertainty hanging over
markets: the nation's still-unresolved fiscal crisis.
investors know who the president will be the next four years and the
makeup of Congress, the main post-election market mover will center
around the so-called fiscal cliff. This term describes the more than
$600 billion in fiscal drag on the economy due to tax increases and
government spending cuts slated to kick in on Jan. 1 unless U.S.
lawmakers act to avert it.
Democrats and Republicans, who have
starkly different approaches to reducing the nation's ballooning deficit
and jump-starting economic growth, must forge a compromise to limit the
potential economic fallout, analysts say.
"It doesn't matter
who's (in charge), both sides (of the political aisle) will have to deal
with the cliff," says Linda Duessel, equity market strategist at
Wall Street's message to President Obama and the new Congress is simple: Act now to get the USA's financial house in order.
the fiscal cliff will be the first order of business," says Craig
Johnson, a market strategist at Piper Jaffray. "If we can get any sort
of sign that the cliff will be avoided or minimized, it would lift
another piece of uncertainty from the investment landscape." It would
also give the stock market a much-needed booster shot of clarity, he
adds, and put stocks back on track to make new all-time highs.
stakes are high. If squabbling lawmakers can't agree on a fix, the
economy will fall back into recession early next year, according to the
Congressional Budget Office.
And a recession spells doom for
corporate earnings, stock prices and investor confidence, warns Hugh
Johnson, chairman and chief investment officer at Hugh Johnson Advisors.
"The economy and market performance," he says, "hinges on the resolution of the fiscal cliff."
lack of clarity related to tax policy, bank regulations and health care
costs have basically put businesses and Wall Street investors in
wait-and-see mode. And an economy on hold, in which hiring decisions and
expansion plans are frozen, is holding back the economy, adds Johnson.
"We have to remove the fiscal cliff uncertainty," he says.
Fiscal crunch looming
Congress doesn't act before Jan. 1, the economy could face a fiscal
headwind of more than $600 billion due to tax increases and government
spending cuts. Potential fiscal drags:
Tax increases: $399 billion
Spending cuts: $102 billion
Other: $106 billion
Total: $607 billion
Source: Congressional Budget Office