Fiscal Cliff Obscures Fading Fundamentals
Investor fears about going over the “fiscal cliff” may be exaggerated. A more tangible threat is the weakening U.S. economy. Earnings are declining, manufacturing has slowed and companies may reduce reinvestment and rehiring. According to this article from Allianz Global Investors “the chances of [the fiscal cliff] actually happening in its entirety are slim.
However, if allowed to occur all at once, it could put an estimated 4% dent in GDP and increase unemployment to 9.1%. Taxpayers would face the largest take hike in U.S. history, an average of $3,500 per household, as estimated by the Tax Policy Center.
The structural issues of U.S. fiscal policy notwithstanding, investors should focus on more concrete risks to their portfolio. Europe is still steeped in crisis; China’s meteoric rise is slowing and there exists erosion of fundamentals at home and abroad. Low interest rates and low growth mean real returns matter.
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