The president and leaders of both parties in both chambers of Congress suggested Friday that they’re likely to reach a deal that would help the federal government avoid leaping over the “fiscal cliff.” Jim McTague of Barron’s warns investors to be wary.
FRIDAY’S NEWS isn’t reason enough for a renewed running of Wall Street’s bulls. If you try to get out in front of all the happy talk, you likely will be gored. The recent selloff was not a panic attack. Savvy investors realize that even if the lawmakers do manage to stop hammering one another long enough to hammer out a grand bargain, the details will be inimical to certain classes of investors. For example, those in the higher brackets might be taxed on some income from municipal bonds. This proposal currently is on the table. And tax rates on dividends and capital gains certainly will rise. This is a given.
Obama is under huge pressure from unions and AARP not to lay a finger on entitlements. This accounts for the hard line on taxes he took at his press conference last week. Democrats can’t afford to alienate those groups; they need their deep pockets for future elections. Obama needs time to persuade them that he will embrace only entitlement reforms that protect their interests. However, the president isn’t fool enough to be so uncompromising on entitlements that he forces the GOP to walk away from a deal. Going off the cliff would end his presidency, for all practical purposes. Gabe Horwitz, economic director for Third Way, a centrist Democratic Think Tank in Washington, says that Obama has a list of ambitious priorities — things like energy, infrastructure, and education — all of which must wait until the fiscal-cliff problem is solved.
So investors should be hopeful, but not act impulsively. Look at what the pols do, instead of listening to what they say.
