Beyond the 'fiscal cliff,' reasons for optimism

Associated Press Modified: November 11, 2012 at 1:15 pm •  Published: November 11, 2012
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NEW YORK (AP) — Forget about the "fiscal cliff."

That might be hard, considering the drama of last week. The stock market had its worst two-day plunge in a year after voters returned President Barack Obama, a Republican House and a Democratic Senate to power.

Investors fear the approaching cliff — tax increases and government spending cuts that begin to take effect Jan. 1 unless Obama and Congress can work out a compromise.

Economists say the hit to the economy next year could be $800 billion and be enough to push the United States back into another recession. And financial analysts are predicting more market turmoil as the deadline approaches.

But lawmakers almost certainly will work out a deal — perhaps messily, unsatisfyingly and with lots of theatrics, but a deal nonetheless. But what happens after that, and to the market in Obama's second term?

Home prices are rising again in many parts of the country. Job growth is much faster than it was last spring. Consumer confidence is up. So is retail spending. And so is the stock market, last week's jitters notwithstanding.

Even some of those who think the economy and markets will run into trouble soon see better times on the other side of the cliff.

David Kostin, Goldman Sachs's U.S. equity strategist, expects a budget battle in Washington to send the Standard & Poor's 500 index down to 1,250 by the end of the year, about 10 percent lower than where it closed Friday.

Once the fight is finished, however, things should turn around quickly, he says. By the end of next year, the S&P 500 will reach 1,575, Goldman says, clearing its previous all-time high by 10 points.

There are factors that could still hobble the economy, of course.

Median household income has dropped every year since 2007, after adjusting for inflation. The unemployment rate is still high. The Federal Reserve warned last month that job growth, like U.S. economic growth, remains slow.

Here are three things you should watch as you plot an investing strategy for the next four years.

THE BOTTOM LINE

The traditional thinking is that a Democratic president equals higher taxes for businesses. But financial analysts at UBS aren't so sure. In a report before the election, they predicted that the corporate tax rate would drop under Obama or Romney.

And anyway, says Carol Pepper, CEO of the wealth management firm Pepper International in New York, companies aren't going to stop growing just because they're faced with higher taxes.

"That," she says, "is cutting off your nose to spite your face."

Also, for more than three years, companies in the S&P 500 have improved earnings every quarter compared with the year before, according to market research company S&P Capital IQ.

Often, their growth has defied expectations. At the beginning of October, analysts were predicting that third-quarter corporate profits would fall nearly 2 percent compared with a year ago.

With about 90 percent of the companies in the S&P 500 turning in results, they're expected to be up more than 2 percent. And higher earnings generally send a company's stock higher.



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