Expectations about the looming fiscal cliff are causing consternation on both Wall Street and Main Street, as investors keep a wary eye on efforts to reach a compromise.
“With a potential recession looming unless Republicans and Democrats don’t reach an agreement on spending and taxes, the stage is set for the two sides to reach a grand compromise,” said James Frischling, president and co-founder of NewOak Capital, a financial advisory and investment bank. “This is the moment when both sides can give enough that it hurts, but not so much as to prevent a deal from getting done.”
The fiscal cliff—a combination of mandated tax increases and across-the-board spending cuts—could have a devastating impact on the economy, potentially sending it into recession.
“The fiscal cliff is a force majeure external event that will hurt economics and trade,” said Steven Carhart, president of Fiduciary & Trust Management Services, an investment manager.
Among investors, a wide disparity of opinions about the fiscal cliff exists across income and occupational lines.
Among the wealthiest investors, defined as those with more than $1 million in investable assets, 72% agree that they understand what the term ‘fiscal cliff’ means, while the figure drops to 33% for those with less than $100,000, according to consultant Spectrem Group’s Millionairecorner.com investor site, which conducted a survey during the last week of October and the first week of November.
Across occupations, opinions differ widely on whether Congress will reach a compromise on the fiscal cliff, with 59% of small business owners and 49% of senior corporate executives saying they “strongly disagree” that a compromise can be reached.
“Investors were more worried about the fiscal cliff than they were about the outcome of the election,” said Catherine McBreen, president of Millionairecorner.com.
“Small business owners are the most negative about the consequences,” McBreen said. “Senior corporate executive are not as worried, which is not surprising given that they tend to have a high financial literacy.”
Almost half of all investors surveyed by Millionairecorner.com said they would increase their investments in cash in response to the fiscal cliff.
President Barack Obama has insisted that any compromise includes an increase in revenues, which means raising taxes on the wealthiest people.
“The president has drawn a line in the sand with respect to increasing taxes on the highest income earners,” said Frischling at NewOak Capital. “While closing loopholes in the tax code and removing a number of deductions will certainly help raise revenues, the president made increasing taxes on the wealthiest Americans a meaningful part of his campaign, and don’t expect him to drop that issue, especially given the margin of victory.”