Jim McCaughan: Election Results Make Fiscal Cliff Deal More Elusive

Friday, 09 Nov 2012 08:29 AM

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Tuesday's elections, which kept Democrats in control of the White House and Senate and Republicans in control of the House of Representatives, might complicate the deal making needed to steer the country away from the fast-approaching fiscal cliff, said Jim McCaughan, CEO of Principal Global Investors.

At the end of this year, the Bush-era tax cuts are scheduled to expire at the same time automatic cuts to public spending are scheduled to kick in, a combination known as a fiscal cliff that could send the country sliding into a recession if left unchecked by Congress.

Both parties are already at odds over taxes, with Democrats clamoring for tax hikes on wealthy Americans and Republicans countering with calls to extend tax cuts for all but closing loopholes.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

If the elections had swung one way or the other, a compromise would have been less elusive, but considering that Americans voted for no major changes in the country's leadership structure, brace for uncertainty and fears of gridlock.

"Unfortunately, the status quo result with President Obama still trying to work with the Republican House means that a compromise is needed on the balance between tax increases and spending cuts for the deficit to be fixed and unfortunately, that means without legislation we're going over the fiscal cliff and into recession in the first half of next year," McCaughan told CNBC.

"I still believe that it's most likely we'll get a compromise, but the probability of a bad fiscal cliff event and a recession has definitely increased because of the inconclusive election as between the presidency and Congress."

Stock prices are poised to rise as much as 20 percent next year after the cliff has passed and the economy can continue recovering, though threats to market gains have increased should fiscal cliff talks break down in Washington, McCaughan said.

"I think what you really need right now is the new Obama administration to work constructively with the Republican House the way the Clinton administration did in the 1990s," he told the network.

"If that happens, then, yes, you will see a very benign outlook next year, but I think there is a risk that that doesn't happen and that's what we need to watch."

Markets were hoping policymakers would return after elections and strike a deal, but since Americans voted to keep the political status quo, the outlook for both the economy and markets remains cloudy.

“The thinking before the election was that it would remove some of the uncertainty, but it seems to have done the opposite,” said Tyler Vernon, chief investment officer at Biltmore Capital Advisors in Princeton, N.J., according to The Associated Press.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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