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Why the Fiscal Cliff Is Meaningless

Everybody is running a special series explaining the fiscal cliff. Everybody is making predictions about the fiscal cliff. Some moronic websites even have clocks counting down to the fiscal cliff.

It’s all hysterics. The fiscal cliff is meaningless.

This is in part because the “cliff” isn’t nearly as dangerous as some would hope. But it’s also because the analysis of what Congress really needs to do is flawed and overly dramatic.

So what should you do as an investor? Well, I will refer you to my recent post on trading strategies for November. In a nutshell, do these three things until 2013:

  1. Watch football
  2. Eat turkey and drink eggnog
  3. Don’t trade anymore

Presuming you had your portfolio in order a few months ago based on seismic shifts in the market — including the demographic push that’s lifting health care stocks, the seismic shift in the mobile technology market, the hunger for yield in a ZIRP environment, etc. — there’s no reason to flip out now.

So stick to your guns and don’t sell anything. Keep your consumer staples and healthcare stocks for the yield, and keep your consumer stocks or tech opportunities you think are looking up next year.

To be clear, I don’t think you should add any more to them, either. But please don’t sell — because this “fiscal cliff” is bound to be a whole lot of nothing.

Why? Well, allow me to sum it up for you in what I hope is the last article you’ll have to read on the topic before an eventual stop-gap deal is brokered:

The Fiscal Cliff Is Not Do-or-Die

The imagery of a cliff plays well in headlines but doesn’t fully represent the shape of things in Washington.

For starters, the non-partisan Congressional Budget Office has admitted that a failure to act in Congress would result in short-term pain — a 0.5-percentage-point reduction in GDP for 2013. However, it then says 2014 and 2015 economic output will be back to where it would be even with Congressional intervention, with a slow downward drift of unemployment after the initial pain that gets us to a 5.7% jobless rate by the end of 2017.

Not ideal to shoulder that short-term pain, especially if it can be avoided. But it’s hardly a doomsday scenario.

Another Stopgap Will Work

In fact, another stopgap might be preferable so the lame-duck Congress can bugger off and we can get the new crop of legislators in their seats for a real debate in 2013.

The automatic taxes and spending cuts were crafted by Congress, and it is a simple matter to craft another piece of legislation that delays these cuts in anticipation of another deal at a later date.

So all Congress needs to do is agree to try to agree later. Some call it kicking the can down the road, but either way it stops us from going over the so-called fiscal cliff.

Too Much Incentive for Republicans to Deal

Here we arrive at an uncomfortable truth: The deficit-fighting plan we would see beyond the fiscal cliff is more liberal/left/progressive (pick your adjective) than anything Democrats have had the gall to propose in Congress — specifically, involving significantly more taxes than cuts to fight the deficit, shouldered mainly by top earners.

That means Republicans almost have to cave.

If the options are “high taxes” or “even higher taxes,” the GOP has nothing to gain from stonewalling … unless the party is prepared to ruin the whole thing and hope voters blame Democrats down the road. That seems like a gamble House Speaker John Boehner and other Republicans would be foolish to make after a disappointing showing in the 2012 election.

After all, even prominent conservatives like Bill Kristol have recently changed their tune and said raising taxes won’t kill America. That’s very telling.

Previous Deal Was Made Under Worse Circumstances

Lest you think the GOP won’t give in, remember the debt ceiling debacle of 2011? That was a real fiscal cliff … because if America didn’t raise the debt ceiling, we literally would have been a deadbeat nation that couldn’t pay its bills. Federal workers could have gone without paychecks. Debt obligations — including Treasury securities to foreign governments and big-time investors — might have entered into default.

In short, chaos would have ensued.

But Congress got a deal done. It was an imperfect deal, yes, which involved conditions that ultimately have led us to this point. But a backstop — even if that backstop is referred to as a fiscal cliff — is in place.

The outcome of gridlock is much less burdensome than last time.

Again … Do Nothing

Of course, this strategy presumes you’ve already taken into account the landscape of the market in 2013 … if not, you’re a bit late to the train, but here are a few secular trends that should have been baked into your portfolio long ago:

  • Get Overweight Healthcare: Boomers are getting older, and this is a demographic megashift you can’t ignore. This includes pharma stocks like Merck (NYSE:MRK) or even REITs serving seniors, such as Senior Housing Properties Trust (NYSE:SNH).
  • Seek Yield: Don’t go gaga over 10%+ dividend payers, but pad your portfolio with consumer staples picks, utilities and other low-risk plays. I happen to really like the Consumer Staples Select Sector SPDR ETF (NYSE:XLP) with its nearly 2.8% yield and diversified holdings of the biggest blue chips in the sector. Investment-grade bonds are another option — but investing in Treasuries amid these ultra-low rates is just pointless.
  • Dabble in Consumer Stocks: Major consumer indicators are looking up, thanks in part to rising confidence bolstered by a resurgent housing sector. Builders have run up dramatically, but there are signs of life elsewhere on the consumer front. This is worth noting for 2013 since you want to be there before the surge — not after.

That’s just a short list … but you get the idea.

A bigger issue would be if you’ve been too deer-in-headlights across 2012 to invest at all, and were waiting for some grand moment of clarity post-Election Day. If you haven’t seen a penny of the market’s 10% year-to-date rally and are looking for answers now?

Well, my friend, you have much bigger problems than the fiscal cliff.

Related Reading

  • We have much bigger problems that the fiscal cliff … namely, holistic tax reform. (MarketWatch)
  • Cyrus Sanati at Term Sheet recently wrote “The Fiscal Cliff May Be Overblown.” (Term Sheet via CNNMoney)
  • Ezra Klein at the Washington Post has opted for “austerity crisis” as a new term to replace the dreaded fiscal cliff. (Wonkblog via Washington Post)
  • VIDEO: Former Treasury Secretary Larry Summers said in a recent interview that the fiscal cliff debate isn’t a license to hold the country hostage. (CNBC)

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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