The phrase “fiscal cliff” refers to US federal spending cuts and federal tax increases that will automatically take effect on January 1, 2013. If the US Congress takes no action, the higher federal tax rates are projected to increase tax revenue in 2013 and beyond, while federal spending is mandated to fall for the next several years. Recently there seems to be some reconciliation on this and although we may not see a resolution before Jan 1st – one can be back dated!
What this means to your portfolio – In the short term we may continue to see some volatility until this is resolved – in the long term – nothing – because it will be worked out.
In order to sidestep the cliff, President Obama and Congressional leaders will have to compromise on a wide range of issues. These include reductions in defense and non-defense spending, deciding whether to extend the Bush tax cuts, whether to raise the payroll tax, and how to deal with extended unemployment benefits and reimbursement cuts to Medicare doctors.
Some analysts suggest the increased taxes will slow spending and potentially cause a recession – others suggest it will help decrease the US Federal deficit and strengthen the economy long term.
With the world watching, the White House and Congress are expected to act quickly to resolve the uncertainty about the country’s fiscal future. If Congress and the White House agree on a deal in early 2013, lawmakers could retroactively restore the prior tax rates and approve additional federal spending
What should you do?
As seasoned investors know, financial markets can rise and fall with the latest cover story, whether from Washington or abroad. The current story, “the Fiscal Cliff” is last years’ US deficit and Eurozone financial crisis, the slowing of China, previous years real estate meltdown and other wars and bubbles. The best approach may be to keep your eyes fixed on your destination and not get sidetracked on day-to-day market fluctuations.
Your investments should reflect your financial goals, time horizon, and risk tolerance. And remember: when uncertainty grips the markets, it may be a great time to take advantage of new opportunities, rather than overreact to short-term events. If you are concerned, please give me a call and let’s take a look at your portfolio to determine whether any changes might be in order.