Will the “fiscal cliff” compromise give the market hope in 2013?

bullGlobal markets surged higher yesterday following news that the “fiscal cliff” in the United States was narrowly averted by lawmakers on Capitol Hill. 

U.S. equities saw impressive gains with the Dow up 308.41 to 13,413 or 2.35 percent.

The S&P 500 rose 36.23 to 1,462 or 2.54 percent while the NASDAQ gained 92.75 to 3,112.26 or 3.07 percent.

Some of the parked money that was formerly sitting on the sidelines awaiting for some positive signs that the U.S. would not go over the “fiscal cliff” was finally put to work yesterday and helped to spur on the equity rally.

The U.S. dollar moved lower at the beginning of the day after currency investors sold the safety of the U.S. currency and moved into riskier asset classes.

However, the U.S. dollar strengthened in the afternoon trading session following positive news about the latest American ISM numbers that revealed U.S. factory activity expanded modestly in the month of December.

Managing Risks

Now that 2013 is officially underway and a modest U.S  fiscal bill was just signed into law by President Obama making it official, investors are watching for some of the economic and fiscal hurdles that still lie ahead in 2013 and have the potential to derail the U.S. recovery.

One of the hurdles that will soon come into focus on the track is the 2 percent payroll tax increase that will come about in 2013 as a result of lawmakers on Capitol Hill not extending the payroll tax cut holiday. Payroll taxes are one of the main sources of revenue for social security benefits.

In December 2010 President Obama granted Congress a two year extension of the Bush-era tax cuts for a one-year, 2 percentage point payroll tax holiday along with some additional  unemployment benefits thrown in.

In  December 2011, Congress voted to extend the payroll tax holiday for two months to avoid a tax increase during the winter recess. In February 2012 the payroll tax holiday was lengthened through the end of 2012.

The U.S. payroll tax increase amounts to a tax increase from the current rate of 4.2 percent back to 6.2 percent for employees and 10.4 percent to 12.4 percent for the self-employed on the first $110,100 of wages.

The payroll tax cut has increased disposable income for Americans by $112 billion, or 0.7 percent of GDP.

Because the payroll tax cut holiday was not extended during the recent fiscal cliff negotiations, on average, workers will get around $1,000 less in take-home pay based on a $ 50,000 a year salary.

Tax increases for Americans already on a fixed budget clearly has the potential to impact future consumer spending in the overall economy.

Another hurdle that investors are awaiting deals with the debt ceiling issue that will need to be resolved in the next two months of 2013.

The U.S. government reached the debt limit on January 1st and Treasury Secretary Timothy Geithner has already begun to adopt “extraordinary measures” to finance about $200 billion in 2013 to temporarily hold back the $16.4 trillion debt ceiling for two more months.

If House Republicans try to play hardball with the White House and Senate Democrats once again as they did in late 2011 during the last debt ceiling debacle which lifted the debt ceiling limit to $16.4 trillion from $14.3 trillion amid a lot of political wrangling, there could be more demands for federal spending cuts which could impact the economy.

Lawmakers on Capitol Hill are still faced with having to come up with another compromised plan before March 1st in order to make $110 billion in across the board sequester cuts that are intended to be divided evenly between defense spending cuts and entitlement cuts.

On the positive side, the U.S. housing market remains firmly in recovery mode and continues to show positive momentum. The employment level has shown some recent signs of improving in recent months.

Whether the positive employment trend continues throughout 2013 remains to be seen. Many business owners have been waiting for the fiscal cliff to get resolved with more clarity before deciding to hire more employees and make capital investments.

Investors are still left wondering if the scaled back “fiscal cliff” resolution will be enough of a catalyst for cautious business leaders to feel more confident about the American economy and decide to put their capital to work by hiring and expanding their businesses since tax policies are somewhat more transparent as a result of the new fiscal compromise.

Lary Fink, CEO and Chairman of Blackrock, was interviewed yesterday on Bloomberg’s Market Makers yesterday and responded to questions about how the fiscal cliff resolution could impact the U.S. economy.

“What I was hoping is this grand bargain. And a grand bargain would then shake CEO’s behavior, shake investors’ behavior with all this cash sitting around that I have been talking about for years” Fink said.

“This does not do it clearly. In fact, I believe that we are going to hold back even more” Fink said before adding, “I don’t see any impetus for a CEO to start investing in planting equipment and hiring until we see the whole magnitude of this.”

Fink spoke about the importance of the debate not being about the debt ceiling but about how we get the men and women in America “thinking about their longevity.”

 

 

 

 

 

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