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Don't Fear the Fiscal Cliff

12/31/2012 7:00 am EST


Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Not investing because of the unknown is never a good strategy, observes Jim Lowell of Fidelity Investor.

I grew up looking for cliffs, never more so than in the harshest days of winter. Cliffs offered me the best platform for a speedy descent. So long as they weren't too precipitous, they provided a gravity-defying course for my blade-sharpened Flexible Flyer.

As expected, November saw fiscal cliff issues dominate headlines and move the markets. With the potential for massive tax hikes and draconian spending cuts, being nervous is more than a state of mind; without a solution, the fiscal cliff's potential to trip us into recession is almost a fait accompli.

Last month, I made answering your investment concerns, from the fiscal cliff to bond fund risks, the focus of the issue. This month, I took those concerns to the desks of the managers we invest in. The goal: present a unique opportunity to let your concerns be addressed by some of the world's best money managers, but least interviewed, whose positioning and performance dictates our money's (not just our worry's) fate.

Here and now, there is no immediate solution in hand, but there is plenty of evidence of working toward one. As I said in one of my recent Hotlines, finding polemical hardheads being replaced with bridge-building hardhats on both sides of the political banks is overdue and welcome.

Everyone in DC knows that our markets translate political turbulence into market turbulence, just as everyone in DC knows that every spending plan requires a revenue generator to keep the lights on, and that there are simply not enough generators to sustain the kind of borrowing and sending binges we have been subject to.

President Obama and House Speaker Boehner have been offering various olive branches, and even their surrogates on the Sunday talk shows have put revenue generation and entitlement cuts on the table...or better put, on a Lazy Susan, as I fully expect posturing on both issues to go round and round.

Still, I think policymakers get it. If they don't agree to raise taxes a bit while also cutting spending some, the massive tax hikes and draconian spending cuts will trip us into recession. At the end of the day, I bet the script will read something like this:

Republicans: "After successful negotiations to ensure that burdensome tax hikes on job creators was minimized and tax cuts for the middle class were secured, we struck a bipartisan deal that avoids the fiscal cliff."

Democrats: "Insisting that everyone play by the same rules and on an equal field where opportunity doesn't just trickle down from millionaires and billionaires, ensuring the safety net to help those hit hardest by the Great Recession, and creating enough new investments to continue our road to recovery, we struck a bipartisan deal that avoids the fiscal cliff."

Let's hope they learn their lines in time.

Fear Factor
In my view, fears of the fiscal cliff are overblown. First off, more than 70% of investors participate in the market with the bulk of their money invested through tax-deferred accounts like 401(k)s or IRAs, or through their company's or union's pension fund. For these accounts, higher investment-related taxes are basically irrelevant.

Overall, I still think that selling investments or not investing based on fears of unknown outcomes is not an investment strategy so much as it is a misguided coping mechanism.

Beyond investing, higher income taxes for all would have an impact on spending and hence send earnings and stock prices down a short and volatile road. But I still think that is unlikely to be the case. The political costs of not keeping the Bush tax cuts for 98% of taxpayers dovetails with the immediate economic costs of not doing so.

We remain defensively positioned and successful at navigating the difficult global environment that we have been in. Even if the fiscal cliff issue is resolved, there's plenty of worry to go round.

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