CHRISTINA REXRODE and MARK JEWELL AP Business Writers
5:12 PM, Dec 21, 2012
NEW YORK (AP) -- You've heard the predictions for what happens if the country goes over the "fiscal cliff": The economy will shrink, nervous consumers will stop spending, and the stock market will plunge.
But those doomsday predictions are overblown, some professional investors say.
Even if Congress and the White House can't reach a deal, the higher taxes and lower government spending that would follow would kick in only gradually. A recession is not guaranteed.
What's much more important to the stock market, the experts say, are economic fundamentals.
"History has shown that the economy is going to do what the economy is going to do," says Scott Carmack, co-portfolio manager at Leader Capital in Portland, Ore. "And politics don't create some sort of disaster."
Whatever happens, the "fiscal cliff" - sweeping tax increases and government spending cuts set to take effect Jan. 1 - is going to dominate the headlines and the market for the next week.
The Associated Press posed a few big questions to investing experts.
Q: What's going to happen in the stock market between now and the budget deadline of Dec. 31?
The market hates uncertainty. If there's no deal next week, expect stocks to fall.
"We always knew we were going to get some volatility here," Carmack says. "Depending on leaders in Washington to come to some kind of agreement is like pulling teeth."
Besides, there are other incentives for people to pull money out of the market. Some professional investors are selling to lock in gains for the year. Others are selling because investments could be taxed at higher rates next year.
"It's been a pretty good year in the market," says Peter Tuz, co-manager of the Chase Growth and Chase Mid Cap Growth mutual funds in Charlottesville, Va. The Standard & Poor's 500 index is up more than 13 percent in 2012.
"People might look at that uncertainty and say, `I'm happy with that, and now I'll take some money aside, and sell,'" he says.
Q: What about after Jan. 1?
Deal or no deal, many investors don't expect the effects of the "fiscal cliff" to linger in the stock market for too long. One big reason is that everyone has seen it coming for months.
"We're not overly concerned," says David Hefty, CEO of Hefty Wealth Partners in Auburn, Ind. "The thing to keep in mind is that what hurts investors, what hurts the market, are things that are unexpected."
He adds: "Everybody has 2008 burned into their minds. They think the fiscal cliff will be the next 2008 event. A 2008 event is when nobody sees it coming, and everyone is blindsided. Nobody's going to be blindsided by this."
Hefty says he'll watch whether the Federal Reserve continues its policy of pumping money into the economy, and fundamentals like housing and unemployment, to decide how to invest in 2013.
"We're looking at two key things that matter the most," he says. "The `fiscal cliff' isn't one of them."
Donald Quigley, the co-manager of the Artio Total Return Bond mutual fund, is more wary of the "cliff" for its political impact than its economic impact. If Republicans and Democrats can't reach a compromise, he says, the world could take that as a sign that the U.S. government is dysfunctional.
"It basically says, `We really don't have our act together,'" Quigley says. "To have to admit that your country is ungovernable is not the best way to run a country."
Q: What if there's no deal?
The impact of higher taxes and lower government spending would be felt only gradually, and Congress could always repeal them later, which is why many analysts don't expect panic.
For example, if higher taxes kicked in, workers might get less money in their first few paychecks of the year, and then the government might reach a compromise and refund the money.
"The fiscal cliff is not really a cliff - it's more like a $600 billion hill that will accrue over the year," Carmack says, referring to the amount of money that could be taken out of the economy from higher taxes and lower spending.
Bob Phillips, managing partner at Spectrum Management Group in Indianapolis, compared the "fiscal cliff" to the Y2K scare.
"The thought was that every computer in the whole world is going to malfunction on Jan. 1, 2000, and it's going to be a disaster," Phillips says. "I think this is a similar thing. It's been built up to this perception that everything will fall apart, and it's not."
Jeffrey Saut, chief investment strategist at Raymond James, says he believes government spending cuts will be "bullish" for stocks because the federal budget will be closer to balance.
He says: "So, if we do take the `cliff' dive, and it's not for too long a period of time, the market takes a hit but the economy resets itself. And we continue to grow going forward."
Q: If there is a deal on time, will the market shoot higher?
Not necessarily. Stocks have been rising more or less steadily since mid-November, a sign investors already believed lawmakers would compromise. The Standard & Poor's 500 index has climbed more than 5 percent since Nov. 15.
That signals that a successful compromise is factored into stock prices already. Much more important to the market's performance in 2013 is the economy.
Some investors, like Phillips, are pessimistic, pointing to an unemployment rate that is still much too high and personal income growth outpaced by inflation.
"You really have to stretch to find a positive trend," he says.
Tim Biggam, market strategist at the brokerage TradingBlock in Chicago, says other world economic problems that have faded from the headlines, like the European debt crisis, could roar back.
"It's kind of a false sense of security," he says, "to have the `fiscal cliff' put everything to the back burner."
Concerns about the U.S. government budget won't be wrapped up by a "cliff" compromise, either.
"Even if they come up with a near-term budget agreement, it will not be enough to solve many of the fiscal imbalances," said Mike McGarr, a Portland, Ore.-based co-manager of Becker Value Equity mutual fund. He predicts that stock market returns for 2013 could be "pretty muted."
"Once you get past whatever sort of budget deal they will come up with, there will be the realization that the story is not over," he adds. "There's going to be a lot more drama."
But others, including Hefty and Carmack, were more confident, pointing out that the housing market is improving, consumer confidence is rising and the unemployment rate is falling.