NEW YORK — Forget about the "fiscal cliff."
That might be hard, considering the drama of last week. The stock market had its worst two-day plunge in a year after voters returned President Barack Obama, a Republican House and a Democratic Senate to power.
Investors fear the approaching cliff — tax increases and government spending cuts that begin to take effect Jan. 1 unless Obama and Congress can work out a compromise.
Economists say the hit to the economy next year could be $800 billion and be enough to push the United States back into another recession. And financial analysts are predicting more market turmoil as the deadline approaches.
But lawmakers almost certainly will work out a deal — perhaps messily, unsatisfyingly and with lots of theatrics, but a deal nonetheless. But what happens after that, and to the market in Obama's second term?
Home prices are rising again in many parts of the country. Job growth is much faster than it was last spring. Consumer confidence is up. So is retail spending. And so is the stock market, last week's jitters notwithstanding.
Even some of those who think the economy and markets will run into trouble soon see better times on the other side of the cliff.
David Kostin, Goldman Sachs's U.S. equity strategist, expects a budget battle in Washington to send the Standard & Poor's 500 index down to 1,250 by the end of the year, about 10 percent lower than where it closed Friday.
Once the fight is finished, however, things should turn around quickly, he says. By the end of next year, the S&P 500 will reach 1,575, Goldman says, clearing its previous all-time high by 10 points.
There are factors that could still hobble the economy, of course.
Median household income has dropped every year since 2007, after adjusting for inflation. The unemployment rate is still high. The Federal Reserve warned last month that job growth, like U.S. economic growth, remains slow.
Here are three things you should watch as you plot an investing strategy for the next four years.
THE BOTTOM LINE
The traditional thinking is that a Democratic president equals higher taxes for businesses. But financial analysts at UBS aren't so sure. In a report before the election, they predicted that the corporate tax rate would drop under Obama or Romney.
And anyway, says Carol Pepper, CEO of the wealth management firm Pepper International in New York, companies aren't going to stop growing just because they're faced with higher taxes.
"That," she says, "is cutting off your nose to spite your face."
Also, for more than three years, companies in the S&P 500 have improved earnings every quarter compared with the year before, according to market research company S&P Capital IQ.
Often, their growth has defied expectations. At the beginning of October, analysts were predicting that third-quarter corporate profits would fall nearly 2 percent compared with a year ago.
With about 90 percent of the companies in the S&P 500 turning in results, they're expected to be up more than 2 percent. And higher earnings generally send a company's stock higher.
That's no guarantee, of course. Revenue for the third quarter so far is up only about 0.6 percent, which means that companies' profit growth is driven not by selling more goods and services but by cutting costs, which can mean laying off workers or trimming salaries.
And compared with a year ago, the earnings and revenue growth is downright anemic. In the third quarter of 2011, earnings grew more than 17 percent over the previous year, according to S&P Capital IQ. Revenue was up more than 11 percent.
Still, if companies managed to grow profits during a slow economic recovery, they should have no trouble doing it if the economy really picks up.
THE CHINA MACHINE
You can't consider the future of the world economy, and therefore the future of the U.S. stock market, without considering China, the world's second-largest economy behind the United States.
You've probably heard that economic growth in China has slowed. But China's economy is still growing at an annual rate of 7.4 percent, more than triple the U.S. rate, and far better than the contraction in most of Europe.
China's middle class is huge and expanding. That makes it more expensive for U.S. companies to produce goods there because of higher living standards, but it also means more customers for American companies to sell things to.
Adrian Day, president of Adrian Day Asset Management in Annapolis, Md., says he's optimistic on China, though it's not without risks. Young people moving en masse from the country to the city can fuel social tensions, and the country's rules still prove baffling or impenetrable for many foreign investors.
"However pessimistic people are about China," Day says, "China's economy is still growing."
DRY POWDER
One popular theory for why the economy is set to improve: Companies hoarded money during the financial crisis and now sit on record piles of cash. The Fed says nonfinancial companies hold about $1.7 trillion in cash and other liquid assets.
Companies have cut back spending on machinery, tools, software and other so-called capital goods, resulting in the slowest growth in "capital stock" in nearly 50 years, notes Michelle Meyer, the U.S. economist at Bank of America Merrill Lynch.
"The positive story is that once the fiscal cliff is resolved, even if it's a messy process, some of the uncertainty hanging over businesses will be removed," she says.
Pent-up demand from corporations could turn into spending in the spring and pick up through next year.
Jeremy Zirin, chief equity strategist at UBS Wealth Management, says the cash heap is the "dry powder" that will fuel growth.
A major caveat: Market watchers have been talking about companies sitting on cash for a long time. The amount has been roughly the same nearly three years, and nothing so far has convinced companies to spend it liberally.
azpatriotmom posted at 9:35 pm on Tue, Nov 13, 2012.
More government regulations, higher taxes, including those in Obamacare, higher utility costs, higher gas prices... the list is getting worse for the middle class. As businesses get squeezed, they will make cuts- and that means lay offs, which we are already seeing and will see more of. The day after the election- nice timing there- Boeing announced lay-offs, as did several more large employers. Other companies including Papa Johns Pizza and Dardens restaurants are looking at reducing employee hours. People are deluding themselves if they think American businesses, small or large, are simply going to absorb the costs of Obamacare.
We are heading into a period of greater regulation and greater government interference- and businesses will not respond well. Make it more expensive to do business, and see lay-offs, cutbacks and offshoring as the result. Service industries will simply cut back to part-time workers. Let's see how consumer confidence stands up to this once the pink slips start arriving.
REG in AZ posted at 2:07 pm on Tue, Nov 13, 2012.
Texas wants to secede from the United States of America. Woman runs over her husband because she is upset over his voting apathy. Another hangs the American flag upside down to protest against Obama winning. Trump suggests revolution in protest, as did a Texas judge. We see it in a political movement, initiated, designed and funded by the Koch brothers, that has people screaming and demonstrating with their focus on “more for me for nothing”. We see clergy sold on aggressively pushing their congregations to vote for the Republican / Tea Party based only on limited issues and ignoring the gross dishonesty and self-serving actions of those politicians that have consistently cost the people greatly. We see very extreme, out of control, emotions based only on irrational blame, expressed to the result of people’s own detriment.
Having a difference of opinion and expressing it is very American but going to these extremes, to advocating this mentality that has become all too prevalent, that is disgusting, actually criminal and anti-American, besides being totally counter-productive, the mentality of “my way or no way”, has really gotten out of hand. We saw it with the congress when right from the start the Republicans said they wouldn’t work with the president and that is what the people have now literally voted against; after having four years of the Republican / Tea Party’s rebellion in irresponsibly putting their political ambitions above all else, arrogantly faulting and stubbornly blocking all efforts, and serving only the interests of “the money”, their strong supporters and masters, the voters have said “that’s enough”.
This mental cancer can be seen as the sole product of “the money” who selfishly, to feed their insatiable “more” (never enough) appetite, spend their substantial power, influence and money to con the people and manipulate public opinion, without any conscience or real regard for the majority or for anything else. The only way to stop it is for the people to reject it wherever they see it and to refuse to be controlled by it, no matter how aggressively they are pushed or how convincing is the deceptive propaganda, the people need to see reality and stay rational, firmly refusing to be “pawns” for “the money’s” purposes. Otherwise, as we have seen, we will just have a strongly divided America caught up in gridlock and discontent, while accomplishing nothing.
VofReason posted at 1:16 pm on Tue, Nov 13, 2012.
So Engaged Voter is identifying the military personnel as the largest group for entitlement largess? That the first I have heard on that one. I may agree though that militry people should probably be paid better than they are. Though that would mean increasing militry spending- any Dems in for that? And these endless tax gifts that Deddzone describes, these must be those dollars that the people earned that they get to keep instead of sending them to the government. Boy, shameless indeed. I mean, we all agree that every dollar that the Government spends is always the most efficuient use of money- right?
Deddzone posted at 12:46 pm on Tue, Nov 13, 2012.
The tax codes are being reset to what they were during the Clinton years---when all paid their fair share.
Amazing how the rightwing dupped the voters into thinking the rich must be handed special endless tax gifts that the middle class will pay for. Of course, ATeam feels the heat of less $$. The rich aren't paying, so you must.
Engaged Voter posted at 11:54 am on Tue, Nov 13, 2012.
"lazy ghetto people who wont work"
Not quite how I'd describe the men and women of our Armed Forces (you know, those lazy deadbeats who pay no Federal tax when deployed for combat, and many of whom get government assistance)...but to each their own. ;)
Ateam1 posted at 11:24 am on Tue, Nov 13, 2012.
I would like to know how Obama has done anything for the middle class in the past,much less how he will do it in the future.My wife and i both work and have 4 kids.Our tax return has dropped 90 percent since the second year he took office and we are not EVEN close to upper middle class! This man is a liar!!! Keep voting for this trash for soon we working people will all go broke and have nothing.He will keep funding going for lazy ghetto people who wont work.My contributions to any and everything affiliated with this is DONE except for what i must pay in taxes by law!PHOOEY!!!
Accuracy posted at 10:35 am on Tue, Nov 13, 2012.
“Beyond the 'fiscal cliff,' reasons for optimism?” . . . quite the contrary – it has made many investors nervous.
Especially, President Obama’s (January 1) tax hike on capital gains, dividends, and other investments that’s got people on edge.
Taxes on capital gains, including profits from stocks, could go from 15% to 25%, and taxes on large dividends at 15% could go up to 43.4%.