Market Response to the Fiscal Cliff

While there are many tax implications associated with the Fiscal Cliff, there are also challenges that the market will face in response to the expiration of tax cuts, credits, deductions and other incentives on December 31, 2012. Bob Wamhoff, President of Wamhoff Financial Planning and Accounting Services, shares this insight:

Why the Fiscal Cliff will impact the market:
  • The stock market typically does not respond favorably to tax increases
  • The best environment for the market is one of consistency and little change in terms of legislation. This creates stability. (Example: the market stays relatively stable during the summer months when Congress is on break because it knows no legislation is coming down during that time.)
  • Until the Fiscal Cliff issue is resolved, the market will continue to be unstable.
Chances are high you’ll be impacted even if you don’t have money in the market:
  • When the “Bush Tax Cuts” expire, everyone’s taxes will go up. Even if you have paid nothing in the past, you may owe once the cuts expire.
  • Social Security and other government programs may be jeopardized if the market goes down and interest rates go up. The Social Security system needs strength in the market to ensure it’s there for the long haul.
What happens between now and December 31, and beyond:
  • Obama has called for negotiations to begin this week, yet the sticking points between Democrats and Republicans continues to be extending the Bush Tax Cuts for those who make over $250,000 a year.
  • If there is a six month extension, the market will be at ease for a few months. As the deadline looms, it will cause uncertainty in the market again, likely about 2 months prior.