Recently, some folks I hadn’t been in touch with for a while reached out to me and said they’d been hearing rumors about an impending fiscal cliff and they wanted to know what was up with that. I assured them that I hadn’t been all that ‘fisical since I stopped playing ball after high school but I was exercising moderately and I appreciated their concern over my well-being.
When I realized they were after my opinion on the messy business that awaits us all at year-end, I probably wasn’t much more help.
Economic Worst Case Scenario
Without diving into the politics of the situation, it’s been estimated that the combined effect of the payroll tax increase and other tax increases and the mandated sequestration of defense spending at year end will knock our economy for a 4% loop. We don’t need to have a PhD in economics to know that a 4% haircut to an economy sputtering along now at a 2% growth rate and 8%+ unemployment is not going to be pretty.
If it happens. Which it won’t.
More Likely Scenario
Sooner or later, the folks we elected will do something. Chances are it will be later, like after the election and quite possibly after the newly-elected Congress is in place. It wouldn’t surprise me a bit if the situation doesn’t get dealt with until February, 2013 and the politicos make some or all of their ‘something’ retroactive to January 1.
Now, I said they’d do something. I didn’t say they’d have a long-term, visionary solution. The ‘something’ they do might well be just another can-kick.
Between now and whenever our paid government servants actually do something about this problem, my guess is that the market is going to be paying an increasing amount of attention to the abyss that’s just beyond that cliff. And when the market does begin to anticipate that legislative action might not occur in a timely manner or the something that is done might be not great for the economy, the direction of the market will not be favorable to our existing holdings.
What Could That Mean?
A correction in total market value of 10-15% from present levels could very well happen between now and January of next year. That’s not a prediction. I simply don’t know what will happen with the overall market.
Preparing For A Change In Market Direction
But, I do know this. There’s not an investment I have that I would not buy more of at a 10-15% lower price than it sits at today. If I had any investment that I would not buy more of at 85-90% of its present market price, I’d sell it tomorrow. And I’d keep the cash from that sale as dry powder – to buy a more attractive, lower-priced investment if/when this fiscal cliff thing starts to scare the market.