Stock Market a Wild Card in Fiscal Cliff Talks

By Charles Babington

WASHINGTON (AP) - Congress and the White House can significantly soften the initial impact of the "fiscal cliff" even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets' reaction, which possibly could be a panicky sell-off that triggers economic reversals worldwide.

The stock market's unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff.

President Barack Obama's re-election gives him a strong negotiating hand, as Republicans are increasingly acknowledging. And some Democrats are willing to let the Dec. 31 deadline pass, because a rash of broad-based tax hikes would pressure Republicans to give more ground in renewed deficit-reduction negotiations.

A chief fear for Obama's supporters, however, is that Wall Street would be so disgusted or dismayed that stocks would plummet before lawmakers could prove their newfound willingness to mitigate the fiscal cliff's harshest measures, including deep, across-the-board spending cuts that Defense Secretary Leon Panetta says could significantly damage the nation's military posture. Some Republicans believe that fear will temper the president's insistence on a hard bargain this month. Obama and GOP House Speaker John Boehner on Sunday held their first meeting between just the two of them since the election, and spokesmen for both emphasized afterward their lines of communication remain open.

The so-called cliff's recipe of major tax hikes and spending cuts can actually be a gentle slope, because the policy changes would be phased in over time. Washington insiders say Congress and the White House would move quickly in January or February to undo many, but not all, of the tax hikes and spending cuts.

Financial markets, however, respond to emotion as well as to research, reason and promises. If New Year's headlines scream "Negotiations Collapse," an emotional sell-off could threaten the president's hopes for continued economic recovery in his second term, even if Republicans receive most of the blame for the impasse.

"Nobody can predict the markets' reaction," said Rep. Jim Cooper, D-Tenn.

Some Republicans are surprised that the White House has not made clearer efforts to reassure Wall Street that if the Dec. 31 deadline is breached, the worrisome pile of tax increases and spending cuts would not hit all at once.

A few liberal commentators are making just that case.

"If we go past the so-called fiscal cliff deadlines and all the resulting budget cuts and tax increases come into force, the administration can minimize the damage," Washington Post columnist E.J. Dionne wrote last week. "Obama can publicly announce he is delaying any cuts, on the theory that Congress will eventually vitiate some of them. And he can make sure the bond markets know of his plans well in advance. ... Everyone (especially Wall Street) should calm down."

Some financial bloggers agree. "Although it would be bad to let the spending cuts and tax hikes fully go into effect, if this thing is addressed in early January, things will be okay," wrote Business Insider's Joe Weisenthal.

So far, the stock markets have stayed calm. The S&P 500 index is up 12 percent for the year.

That might be because investors agree that a temporary trip over the cliff wouldn't be too harmful. Chastened lawmakers, the thinking goes, would quickly minimize the economic damage with a deficit-reduction compromise that eluded them in December.

Or, it's possible that investors view the most pessimistic tones surrounding the fiscal cliff talks as posturing that will give way to a last-minute deal. If that is the thinking - and if the Dec. 31 deadline instead is breached - Obama's fear might come to pass: The expectation of a deal might produce a significant decline in stock prices if it doesn't occur.

As bad as that sounds, some liberals think it will be necessary to force many Republicans to drop their opposition to higher tax rates on the wealthy that Obama says are crucial to trimming the deficit.

Rep. Peter Welch, a Vermont Democrat who says temporarily going over the cliff wouldn't be so bad, noted what happened on Sept. 29, 2008. The House surprised investors by rejecting a proposed bailout of the crisis-stricken financial sector. Republicans strongly opposed the plan despite then-President George W. Bush's support. The Dow plunged 777 points, its largest one-day point drop ever.

Four days later the House, shaken by the market reaction, passed a slightly modified bailout bill.

Welch said a similar market meltdown next month, in the event of a fiscal cliff impasse, "is what will force members of Congress eventually to act."

Few lawmakers in either party are eager to predict how the stocks and bonds markets would react to a failure to reach a fiscal cliff accord by year's end.

"Let's not pretend the markets fully understand the politicians, or the politicians fully understand the markets," said Rep. George Miller, D-Calif., who has served in Congress for 37 years.

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The politicians don't understand the markets??? LOLOL They don't understand anything except campaign rhetoric. Let's set up a guillotine on the Capitol steps and line all 435 of them up....

December 11 2012 at 1:16 AM Report abuse rate up rate down Reply
1 reply to mccglf's comment

That only works with snakes, not lawyers.

December 11 2012 at 3:14 AM Report abuse rate up rate down Reply

Alan/Evan believes everything the looney lib media tells him. What a dope.

December 10 2012 at 11:32 PM Report abuse rate up rate down Reply

The fiscal cliff today, or after 2018. The bills are coming. The 21 taxes of Reid/Peolosi healthcare bill. The stimulas package of 2009 taxes are here and more to follow. The devil was in the details of that Bill too.
Don't think for one second-$100,000 to 250,000 you are not going to get a raise in your taxes. What the democrats don't start to get you, the state will. After all, you don't have a problem with taxes. Tax that guy! Not me!

December 10 2012 at 10:28 PM Report abuse -1 rate up rate down Reply

Let's see President Obama went to Michigan to speak to the freeloaders of UAW of Detroit. Who does not pay the taxpayers the money they owe us. The city of Detroit is going bank rupt the mayor has asked for her money and payback. Who doesn't care if no other African American gets the dream of being rich by his brains or ideas. Just as long as the left wing politican gets the agenda done o so thaty can stay in business. That's the progressive idea, they make the money from the taxpayers. You will be the beggar and they will be the rich man of the country club. Just like Wall Street with the free money from the Treasury.

December 10 2012 at 7:55 PM Report abuse -5 rate up rate down Reply

why does everytime the Pres speaks on TV .. he sounds like he is addressing 10 year old kids ..... amazing how he speaks down to the public

December 10 2012 at 4:25 PM Report abuse -3 rate up rate down Reply
1 reply to rgmac12's comment

100% CORRECT,,,,,,I have never seen tv spokes persons and so called news media,,,,chase after a man like they do ,,obama,,,,
IT IS SICK,,,,,,,,,,

December 10 2012 at 4:59 PM Report abuse -3 rate up rate down Reply

I just can't believe all of you are focused on all the rest of the cuts that occur. Personally I am disenchanted with Obama because all he says every day is to raise rates. Raising rates is FINE, he won the election. The sulphur is the cuts his liberal supporters must endure and he know it will hurt him.
The republicans are no better. Their plan is smoke and mirrors at best.

December 10 2012 at 2:51 PM Report abuse -1 rate up rate down Reply
1 reply to jhrooney's comment

Again,,,I do agree with another post......Both parties are to blame.....There is NO CLIFF .......THIS IS MADE UP IN WASHINGTON TO SCARE THE PEOPLE,,,,,,,,,LIKE GRAND MAW BEING PUSHED OVER,,,

December 10 2012 at 5:00 PM Report abuse -3 rate up rate down Reply

Lots of commenters here seem to think the sky is falling. I think way too many people are watching Fox News.

December 10 2012 at 2:37 PM Report abuse +2 rate up rate down Reply
3 replies to offcenterlevi's comment

People of the World,,,,,,,,,,,,,,,,All this between Democrates,,,Republicans,,,,,,,,,,is a SHAM,!!!!!!!!!!!!!!!
There is no Cliff,,,,,,,,,,,,If this was a great concern,,,both parties would be hard at work to fix it.!!!!!!
All part of the BIG GAME WASHIGTON PLAYES.!!!!!!!
Now,,If this was your house,,,you would fix the problem fast.......STOP SPENDING SO MUCH,,,,YOU CAN NOT SPEND,,MORE,,THAN YOU TAKE IN....
Raise all the tax rates,,,hikes you want,,,,,,,,,,,,,,,,,,,,,,,STOP SPENDING IS THE PROBLEM,!!!!!

December 10 2012 at 1:01 PM Report abuse -2 rate up rate down Reply

amazing folks. Obama and dems had control of the senate and the house during his first 2 years in office. Plus a filibuster proof senate. Why didnt Oabama and the Dems increase the tax rate on the rich then!!!!!!. Simple because if it had failed. the dems would be solely to blame. Now if it fails the Dems can also blame the republicans. Obama and the Dems are a fraud and corrupt group of money hungry spenders.

December 10 2012 at 12:48 PM Report abuse rate up rate down Reply

I don't know but it seems we already have fallen off the cliff long time ago !

December 10 2012 at 12:37 PM Report abuse +11 rate up rate down Reply