So here we are again. Another saga of politicians making promises, trading accusations and accomplishing nothing of substance. It's been said that the definition of insanity is doing the same thing over and over and expecting a different result. So what does that say about our "leaders" in Washington?
It's obvious we have a 16 Trillion and growing problem. One side believes that the solution is to keep increasing taxes...as long as we only do it to the "rich". The other side believes that the only solution is to cut government spending.
This impasse brings us to what the media loves to call the "Fiscal Cliff".
What makes the Fiscal Cliff such a great title is that it sounds really scary. Fear increases attention. Increased attention translates into more viewership. More viewership translates into more revenue for the media outlets. As a result, the media loves scary things, real or imagined.
In reality, if our politicians cannot agree on a solution then that will create a problem. That problem will be more of a fiscal slide over time rather than the fiscal cliff that has been portrayed. If the slide occurs it will likely take months to play out before it has any direct effect on our economy.
If it did play out over six months or more then the revenue that would be sucked out of the economy could potentially push us into another recession. If that recession played out then that would be bad for all investments.
Even though it would take months to play out from a practical standpoint, potential selling could be immediate and more severe if investors act emotionally and start selling just because they are scared.
In the previous politically induced potential calamities, ie. the European Crisis, the Debt Ceiling Crisis, and the U.S. Treasury Debt Downgrade Crisis... politicians reacted by effectively doing nothing and kicking the can down the road. In the end, they did what they always do and went back to spending more of other people's money.
There is a decent chance that they will do nothing. Not because it is the right thing to do...but because it is politically advantageous. If they do "something" it will likely not help the core debt problem. However, just going through the actions of doing something would likely have a positive effect on the markets.
In my opinion, I believe that if the market does sell off because of what the politicians do, I don't think that it would be long lived. In other words I would expect the losses to be reversed over the following months just like the previous political meltdowns. On the other hand, if they come to some agreement that is viewed positively by investors then there is a decent chance we could see some upward market movement. In short, I think that there is more downside for investors by being out of the market right now than there is to stay invested. Keep in mind, unfortunately, I can't see into the future, and markets are free to do whatever they want.
In the end, the most important thing to do is make sure that your risk tolerance is set at a level that you can live with. Make sure you are comfortable with your mix of conservative versus growth oriented investments. If your risk tolerance is set properly, then you should not be stressed regardless of how things play out. As always, please contact us if you have any questions or concerns.