Jim McCaughan: Fiscal Cliff Isn’t the 'Ogre' It Appears

Friday, 10 Aug 2012 09:20 AM

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A combination of expiring tax breaks and inbound government spending cuts, known as a "fiscal cliff," won't inflict as much damage on the economy as most people fear, said Jim McCaughan, CEO of Principal Global Investors.

Tax breaks, including the Bush-era tax cuts, expire at the end of the year right at the same time automatic cuts to government spending agreed upon to end the 2011 debt ceiling impasse kick in.

Some estimates see the fiscal cliff siphoning over $500 billion out of the economy next year alone, sending the country right back into recession.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Congress must address the issue, but lawmakers will likely sidestep addressing politically sensitive tax and spending issues in an election year.

Some have suggested dealing with the issue in 2013 after the elections but on a retroactive basis, which is a logical.

"I think the U.S. market should continue to be fairly strong based on growth, which will be modest, about 2 percent. The thing that's out there that's really causing legitimate fear is the fiscal cliff. Sadly I don't believe anything will be done by Congress or the administration about the fiscal cliff until after the election," McCaughan told CNBC, adding policymakers will tackle the problem.

"I don't think the fiscal cliff is as bad a great ogre out there in 2013 as some might say. So I expect the market to still be quite good."

Stocks to consider include those in manufacturing and similar sectors, McCaughan said

"I like Caterpillar. That's the kind of stock that will continue to do well in this market. Manufacturing, capital goods, don't forget Boeing and transportation equipment," McCaughan said.

"Avoid the consumer discretionaries. Those are actually going to find that a fairly austere consumer is not going to get away with borrowing. This is not going to be 2006 again."

Federal Reserve Chairman Ben Bernanke has said failure to deal with the fiscal cliff can derail economic recovery.

"U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority,” Bernanke told the Senate Banking Committee in the first leg of two-day testimony recently, according to the National Journal.

“At the same time, fiscal decisions should take into account the fragility of the recovery.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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