Uncle Sam is keeping investors on their toes.
While a last-minute deal kept the nation – and Wall Street – from falling off the “fiscal cliff” late last month, the agreement only settled some of the lingering tax and spending issues facing Congress and the Obama administration.
The deal generates $600 billion in new revenue over 10 years, but that’s less than half the amount President Obama first called for. It raises income tax rates, but only on the very rich, despite Obama’s campaign for broader increases.
It puts off the toughest decisions about spending cuts for military and domestic programs, including Medicare and Social Security. And it does nothing to mitigate the looming partisan showdown on the debt ceiling, which must rise soon to avoid default on U.S. loans.
Under the New Year’s Eve deal, automatic cuts of about 8 or 9 percent are set to sweep through nearly all federal agencies, with half the money coming out of the military unless Congress stops them by March 1. And the federal government will be bumping up against its debt ceiling again by late February or early March – an event that almost spurred a government shutdown the last time around.
For investors, that means the stock and bond markets will continue to be swayed – even more than usual – by what Washington does, or doesn’t do, in the coming months.
“Partisan politics will likely continue as Washington battles potential changes to its spending and entitlement programs,” said Cynthia E. Vance, a certified financial planner at Jensen, Marks, Langer & Vance, a Buffalo money management firm.
“It’s very difficult to predict the market, because of all the global governmental regulation and intervention,” Vance said, noting that the Federal Reserve also has been keeping interest rates at historic lows to help stimulate the economy.
“It’s been several years since we could just focus on fundamentals, such as corporate profits or earnings,” she said.
That uncertainty has influenced investors. Late last year, when there was uncertainty over whether a fiscal cliff deal would raise tax rates on capital gains, some investors were selling shares to lock in their profits at last year’s 15 percent capital gains rate, said Tim Johnston, the managing partner at Sandhill Investment Management in Buffalo.
That move paid off. Under the December deal, rates for their capital gains and dividends rose to 20 percent.
“With the higher tax rate and the fiscal cliff, a lot of people were taking their gains,” Johnston said. “A lot of people have been sitting on the sidelines.”
Of course, investors haven’t been hurt as Washington grapples with fiscal cliff issues. The stock market posted double-digit gains last year, even as economists warned that falling off the cliff could plunge the nation back into recession.
And today, the uncertainty continues. “We find ourselves once again greeted by negative hyperbole,” said Bruce Kaz, the president of Courier Capital Corp., a Buffalo money management firm, who noted that investors who shrugged off those fears were rewarded with above-average returns last year.
Five years after the Great Recession began, the U.S. economy still is struggling to gain steam. Many economists think it will grow a meager 2 percent or less this year, down from 2.2 percent in 2012. The unemployment rate remains high at 7.8 percent, and few economists expect it to drop much this year.
The fiscal cliff deal socked nearly 80 percent of working Americans with a 2 percent cut in their take-home pay as a temporary reduction in Social Security payroll taxes was eliminated. The increase will cost someone making $50,000 about $1,000 a year and a household with two high-paid workers up to $4,500.
But there also are hopeful signs. Corporations have cut costs and have amassed a near-record $1.7 trillion in cash. Home sales and prices have been rising consistently, along with construction. Hiring gains have been modest but steady.
“Individuals and corporations continue to have enormous cash positions, despite getting record-low interest rates,” Vance said. “Once individuals and companies decide to invest this capital, it could have a significant impact on the global economy.”