What are the chances of a fiscal cliff deal? Every day seems to bring a new assessment from the media. As Christmas approaches, little progress has been made and the Senate is poised for a holiday recess ending December 27. If a deal isn’t reached, what might result for the economy and the markets?
What’s the worst that could happen? For that scenario, we might as well check in with “Dr. Doom.” That is the nickname for Nouriel Roubini, the economist who famously predicted the 2008 Wall Street downturn. Earlier this month, Roubini told Bloomberg TV that “there’s a highly likely chance we’re going to go over the cliff.” Come January, “the market reaction is going to force the two sides to reach an agreement.” Roubini thinks that even with an agreement, our 2013 GDP will be about 1.7%. On a positive note, he feels that “the [long-term] fundamentals of the U.S. are a lot stronger” than those of other key world economies.
Roubini’s forecast is far from the worst out there. In its gloomiest scenario, UBS sees a 2% contraction in GDP for the first half of 2013 with the S&P 500 trading at 1,000-1,100, demand for the dollar soaring, and prices of metals and energy futures sinking. Morgan Stanley thinks there could be as much as a 5% hit to GDP given that the payroll tax holiday will also likely expire; Bank of America sees anywhere from a 2.5%-4.6% impact on 2013 GDP, with a multi-stage fix for the problem on Capitol Hill wrapping up by April. The Congressional Budget Office’s worst-case scenario includes a recession and 9.1% unemployment.
Could we merely see a fiscal slope, or a fiscal pothole? If a deal is deferred until late January, the economic impact might not be as bad as feared. Congress could end up retroactively preserving the Bush-era tax cuts for most Americans, and the tax increases resulting from the cliff could be struck down.
Here’s why it looks like a slope rather than a cliff: the so-called sequester (the $1.2 trillion in planned federal spending cuts) will occur gradually over the next decade rather than instantaneously. If no deal occurs, next year’s across-the-board federal spending cuts will total only $109 billion, and they could even be smaller if Congress hastily opts for a package of selective cuts rather than a real fix; one proposal circulating around Capitol Hill this fall only called for slashing $55 billion in 2013, according to Reuters.
In the fiscal pothole scenario offered by analysts at UBS, small concessions are made on Capitol Hill as 2012 ends (i.e., the payroll tax holiday and long-term jobless benefits expire while taxes increase temporarily), pursuant to a “grand bargain” in 2013 that cuts at least $4 trillion off the deficit in ten years.
What sector would be hit hardest if there is no deal? As an article at TheStreet.com mentions, the consumer discretionary sector may be significantly impacted without a fiscal cliff fix for 2013. The automotive, apparel and entertainment industries in particular might see waning consumer demand.
If the economy does fall off the cliff, the effect will probably be felt gradually by businesses large and small. The sudden shock may occur on Wall Street, which in the glass-half-full scenario prices the fall in without bulls fully retreating.
Now is a good time to evaluate your options in case a deal doesn’t happen in Washington. Play it safe and have a defensive plan of action for your core assets!
1. Never invest money you cannot afford to lose.
These trades are high risk and can rise or fall by 25% or more in a single day. Please use caution before trading.
2. Make sure you have a stop-loss in place with the maximum you are prepared to lose. I typically cap losses at 20-25%.
3. Only buy up to our recommended buy price. Once a stock is above our set price the profit potential has been reduced and risk to reward relationship is less favorable.
4. Have fun trading/ become a student of the markets. A-B-L: Always be learning! In order to be a better trader you need to improve your knowledge on the markets. Wall St Renegade exists to help you learn and understand the art of trading!
Wall St Renegades,
Many of you have been raving about our new trading system. Kevin made $10,000 last week!
If you have a winning story, share early and often…
Well we have 2 more winning trades to report!
Today we are selling:
1. Sell 100% of MIPS TECHNOLOGIES INC (MIPS) with a 5% gain. They didn’t get quite the earnings pop we hopped for and we hung in here a little longer to see if momentum would shift upward. Though not as good as we expected, we still made 5% in a few short weeks.
2. Sell 100% of SYNTA PHARMACEUTICALS (SNTA) with a 15% gain. This stock is up 12% today. Let’s lock in the gain! Another 10%+ winner!
So are open positions right now are:
10% in SRPT
10% in AMRN
10% in NPSP
70% in cash