Political leaders cobbled together enough votes to do a deal. But what exactly does the fiscal cliff deal mean for investors? Dr. Brian Jacobsen, CFA, CFP®, chief portfolio strategist with Wells Fargo Funds Management, LLC, explains in this excerpt of On the Trading DeskSM from Friday, January 4, 2013.
Are any aspects of this deal particularly relevant to investors?
I think a lot of it is relevant to investors. For one thing, the payroll tax cut going away is probably going to affect consumer spending in the first part of the year. Also, the fact that the dividend tax rates did not go up, to being treated as though it is regular earned income, I think that’s important. Three things I think are probably most relevant for investors in the short term. The first is the debt ceiling. We have about $16.4 trillion as a debt ceiling. Well, we’ve already hit that. And so the Treasury can, through extraordinary measures, buy some time until probably sometime towards the end of February or beginning of March—in which case we’re going to have another debt ceiling negotiation take place between the president and Congress. That could create a little bit of market uncertainty. Another aspect is the sequester—they didn’t really deal with it. They just said we’re going to punt this to March 1st when we’re going to try to cobble together some deal to deal with these spending cuts. Then the third aspect is how the federal government is funded. They haven’t had a budget for four years, and so they have been operating on a continuing resolution that they continually renew in order to keep federal programs funded. Well, that expires on March 27th, and so we’re probably going to see some more drama coming out of Washington, negotiating whether or not there should be another continuing resolution and what shape that should take.
Clearly, there is more to come in the weeks ahead, Brian, but what should investors be keeping their eyes on particularly?
I think over the next few weeks we can actually pay a little bit more attention to some of the economic data that might be coming out—the health of the labor market. When it comes to Washington, some of the things to watch are going to be related to this new session of Congress that was sworn in at noon on January 3rd. How are they going to negotiate with the president? There’s been a lot of concern about the 112th Congress, which just expired, and now we’re entering the 113th. We should get an early read in terms of the tone coming out of Washington. So I’d be watching how is it that the debt ceiling debate transpires, how they deal with the sequester issue, because that’s going to have to be dealt with by March 1st. And then how is it that this continuing resolution gets dealt with as far as funding the federal government. So these are a couple of things that between the end of February and beginning of March we’ll probably get a pretty good feel for what the next two years might look like, at least out of Washington, D.C.
And as those events unfold I imagine you’ll help us stay informed.
I’ll do my best.
Brian, thanks for joining us.
Thank you.
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