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Old 11-07-2012, 11:18 AM
Franc Tireur Franc Tireur is offline
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In wake of election, fiscal cliff emerges as No. 1 risk

Now that the 2012 U.S. election is over, removing one of the major sources of uncertainty for financial markets, the focus on Wall Street will quickly shift to the other big uncertainty hanging over markets: the nation's still-unresolved fiscal crisis.

Now that investors know who the president will be the next four years and the makeup of Congress, the main post-election market mover will center around the so-called fiscal cliff. This term describes the more than $600 billion in fiscal drag on the economy due to tax increases and government spending cuts slated to kick in on Jan. 1 unless U.S. lawmakers act to avert it.

Democrats and Republicans, who have starkly different approaches to reducing the nation's ballooning deficit and jump-starting economic growth, must forge a compromise to limit the potential economic fallout, analysts say.

"It doesn't matter who's (in charge), both sides (of the political aisle) will have to deal with the cliff," says Linda Duessel, equity market strategist at Federated Investors.

Wall Street's message to President Obama and the new Congress is simple: Act now to get the USA's financial house in order.

"Tackling the fiscal cliff will be the first order of business," says Craig Johnson, a market strategist at Piper Jaffray. "If we can get any sort of sign that the cliff will be avoided or minimized, it would lift another piece of uncertainty from the investment landscape." It would also give the stock market a much-needed booster shot of clarity, he adds, and put stocks back on track to make new all-time highs.

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The stakes are high. If squabbling lawmakers can't agree on a fix, the economy will fall back into recession early next year, according to the Congressional Budget Office.

And a recession spells doom for corporate earnings, stock prices and investor confidence, warns Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors.

"The economy and market performance," he says, "hinges on the resolution of the fiscal cliff."

The lack of clarity related to tax policy, bank regulations and health care costs have basically put businesses and Wall Street investors in wait-and-see mode. And an economy on hold, in which hiring decisions and expansion plans are frozen, is holding back the economy, adds Johnson.

"We have to remove the fiscal cliff uncertainty," he says.

Fiscal crunch looming

If Congress doesn't act before Jan. 1, the economy could face a fiscal headwind of more than $600 billion due to tax increases and government spending cuts. Potential fiscal drags:

Tax increases: $399 billion
Spending cuts: $102 billion
Other: $106 billion
Total: $607 billion

Source: Congressional Budget Office

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