The stock market retreated recently on fiscal cliff stock worries, according to the news. So, what the Heck is a Fiscal Cliff? Fiscal Cliff is a political term. The fiscal cliff implies a rapid economic disaster upon letting the Bush era tax cuts expire, allowing mandatory Federal spending cuts to occur, and seeing an expanding budget deficit. The fact is, folks, there is no cliff in fiscal cliff. There is the risk of an economic decline and even a recession if the issues at hand are not dealt with in a responsible manner. However, the worst case scenario is a slow fiscal slide, which does not have the political pizzazz of “fiscal cliff.” Nevertheless, the market is worried and oft times market sentiment diverges from sound fundamental analysis, taking profits with it. Before letting fiscal cliff stock worries ruin our day, let us think about how the various aspects of the so called fiscal cliff might affect intrinsic stock values and margin of safety, the touch stones of sound long term investing. To the extent that the issue is overblown there may opportunity to pick up good stocks at low prices. To the extent that congress and the president resume the willful Capital Hill circus of last year it could be time to take fiscal cliff stock worries at face value and get out of the stock market.
Hopes of Fixing the Fiscal Mess
The mighty US dollar suffered a downgrade last year due to the comedy on Capitol Hill over raising the debt ceiling. The US Federal Reserve has been buying US Treasuries which has had the effect of driving down interest rates and forcing bond buyers into the corporate market. Interest rates on treasuries will likely go up and prices of treasuries will likely go down if the adults take over on Capitol Hill and work for the good of the nation and not their particular political constituencies. The long term results of coming to grips with the Federal Deficit with mixture of tax increases and even handed budget cuts, could spell a long term economic rally the USA and the world as well. Long term investors are well advised to watch to see if the current negotiations come to fruition of if the nation will continue to wallow in fiscal stimulus generated low interest rates, devaluation of the US dollar, and ever more staggering debt for future generations to deal with.
Practical Approaches
Success in long term investing comes from accurately picking the winners and avoiding the losers. If the US gets its fiscal house in order investing in gold will become less attractive. To the extent that the fiscal slide occurs precious metals may get a boost. During the upcoming period of uncertainty options contracts may hold the key for conservative investors. Puts can act as insurance on stocks that you believe to be at risk for a fall. Calls will hold your place in line, at the current price, for stocks that you believe might rise. A practical approach during times of market uncertainty is to search for undervalued stocks and profit as their share prices rise.