Failure to reach a deal to avoid the fiscal cliff by Jan. 1 won’t send the economy plunging into an apocalyptic abyss, but it will turn up the heat on markets, possibly wiping out a typical year-end Santa Claus rally, said Jack Ablin, CIO at BMO Private Bank.
“I think we’re in a kind of limbo here, waiting for some outcome,” Ablin told CNBC.
The White House and congressional Republicans have yet to agree on a way to avoid the fiscal cliff, a combination of expiring tax breaks and inbound spending cuts set to take effect starting Jan. 1.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
Sticking points involve a White House proposal to let tax breaks expire on the top 2 percent of U.S. earners.
The nonpartisan Congressional Budget Office has warned failure to steer the economy away from the fiscal cliff could tip the country into a recession next year, though tax bills and spending cuts won’t all come due on Jan. 1 but over the year, meaning policymakers have time to reach an agreement.
“Even if they don’t reach an agreement, it’s not the apocalypse if we hit Jan. 3 or 1, and there’s no agreement,” Ablin said, adding markets could come under pressure at a time they normally rise.
“It’s like our economy is sitting in a pot of water. Come Jan. 1, the heat is turned on, but it will still take a while to reach the boiling point. I think the pressure is certainly going to be on if there’s no agreement by year-end. I think it’s going to create a lot of nervousness and tenuous trading.”
Fears that taxes on capital gains taxes could rise may fuel selling in the coming days as well.
“The math on capital gains is skewed toward selling,” Ablin told the network.
“I think it’s more of a downward bias than anything else. Santa is going to be trumped by capital gains.”
President Barack Obama and House Speaker John Boehner, R-Ohio, continue to meet to find ways to avoid the cliff, and while an agreement has yet to be reached, some Republicans have suggested they’ll support tax hikes on the wealthy in exchange for spending cuts elsewhere.
“I think it’s time to end the debate on rates,” said Sen. Richard Burr, R-N.C., according to The Associated Press.
“It’s exactly what both parties are for. We’re for extending the middle-class rates. We can debate the upper-end rates and what they are when we get into tax reform.”
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
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