The so called “fiscal cliff” is likely to be in the news for some time as Democrats and Republicans begrudgingly negotiate a compromise. But, will they negotiate a compromise or will both parties play to the media and their constituencies to the detriment of the American economy and the American people? What we refer to as the fiscal cliff fear factor may drive investors to make poor and hasty decisions based upon ever changing and rather poor information. Long term investing hinges on solid fundamental analysis of all factors that determine the intrinsic value and margin of safety of the stocks in one’s stock portfolio. When the fiscal cliff fear factor drives investor sentiment prices, market volatility may allow traders to make money but can simply result in big headaches for those who invest for the long term.
Fix It Now, Please!
There are a number of pertinent issues regarding the so called “fiscal cliff.” First of all it is not a cliff. What if the President and Democrat dominated Senate cannot come to terms with the Republican dominated House of Representatives? The effects will play out over several years. If the middle class tax cut is not extended, it will have a measurable effect on the economy, over a period of months and years. Likewise, if the tax cut for the highest US income earners is not extended it will also play out over months and years. The same applies to mandatory cut backs on military spending and social programs. A smart investor can manage his or her investment portfolio to accommodate any and all possibilities. However, a fiscal cliff fear factor, a fear of uncertainty and unnamed economic catastrophe, can drive the market and cause investors to make poor choices that will serve them badly in the long run. The better result for long term investors will be for the President and Congress work to an early solution so that the fiscal cliff fear factor can go away. Then the average investor can choose his or her stocks, invest for retirement, and collect on his dividend stocks without the gnawing sense of uncertainty that is the fiscal cliff fear factor.
And if the Problem Continues?
Let us assume that business as usual will continue in Washington. Republicans will probably dig in their heels. They will continue to work on their long term goal of rolling back the social programs of the Great Society of the 60’s and New Deal of the 30’s. Democrats will seek to preserve the same social programs while dealing with budget deficits, the likelihood of a steadily devaluating dollar, and the risk of losing the White House in 2016. The eternal cat fight on Capitol Hill never seems to serve the interests of the Nation but that is how it is. How can an investor benefit from the market chaos caused by the fiscal cliff fear factor? No matter how heated the arguments become there will eventually be a solution that preserves the US military, social programs, and reduces spending for both. Consumer products stocks are typically a good refuge in tough times. One might think that it is time to sell defense stocks, but the better choice may be to wait for market prices to fall and buy at bargain prices before a deal is made. This argument probably applies across the board. Let the fiscal cliff fear factor drive prices down and buy when prices bottom out. When the cat fight on Capitol Hill finally resolves itself, prices will likely go back up. As usual do your own fundamental analysis and look for a good margin of safety in the stocks that you buy.