GOLDEN VALLEY, Minn. - The stock market is down about percent since our nation's election last week, as investors may be coming to the realization that "status quo" gridlock remains in Washington.
This gridlock may mean that near-term resolutions to the fiscal cliff or longer-term structural plans to resolve the US debt situation are in question. To help discuss financial perspective and our post-election outlook is Dan Ament, Financial Advisor with Morgan Stanley Wealth Management in Wayzata.
Fiscal cliff Still Looms
Post election, the major challenge in Washington will be to steer the country away from the year-end fiscal cliff. That cliff, which is the result of expiring Bush-era tax rates and the spending cuts that Congress agreed to in August 2011 as part of the debt-ceiling deal, represents a potential fiscal drag of 5% of GDP-enough to tip the US economy into recession, according to the Congressional Budget Office.
The Bush-era tax rates are still set to expire at the end of 2012 and, absent any congressional action, would result in a sizeable tax increase. Most of the political disagreement centers on extending current rates in one area: high-bracket taxpayers.
We think it likely that existing rates will be extended for most taxpayers for one year-with some compromise for upper income brackets-to give politicians time to address this in 2013.
Finally, the impending across-the-board mandatory spending cuts would also cut defense-an outcome we think Congress will avoid. Thus, the full effect of the fiscal cliff will likely be mitigated and delayed. The remaining economic drag stems from expiring payroll-tax relief and extended jobless benefits, both of which have little political support for renewal. Stay tuned.
Corporate CEOs Weigh In
With House Republicans and White House dug in behind trench lines over tax hikes for the wealthy as part of a deal to avoid the fiscal cliff, many observers are hoping that business leaders can negotiate an armistice. Business leaders are arriving in Washington on today for talks with President Barack Obama at the White House. remains to be seen if the business community has enough clout to get the two sides to bargain seriously.
U.S. Credit Rating at Risk... Again
Next year, Congress needs to deal with the longer-term effects to avoid another credit rating downgrade. Because the credit rating agencies are watching, we expect credible action to improve the long-term deficit outlook. Left unaddressed, the deficit issue could lead to another U.S. credit down grade and financial market instability.
Lackluster Economic Growth Expected
Morgan Stanley economists forecast that modest fiscal drag will dampen U.S. GDP growth to a rate of 1.4% in 2013 from 2% this year. 2013 global growth is forecast at 3.3% with 80% of that growth coming from emerging market economies. Inflation is expected to remain tame in most countries.
(Copyright 2012 by KARE. All Rights Reserved.)