Brian Jacobsen

Fiscal cliff: A 13th-hour deal

Economic News and Analysis—1-2-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

The fiscal cliff deal struck between congressional leaders and the White House wasn’t an 11th-hour deal but rather a 13th-hour deal. In the wee hours of the morning on New Year’s Day, the Senate passed a bill to allow taxes to increase on households making more than $450,000 a year. Of course, because it was January 1 and the Bush-era tax cuts technically expired, maybe it was actually voting for tax cuts on everyone making $450,000 a year or less.

After a nail-biting, hair-pulling, and sometimes otherwise annoying New Year’s Day, the House of Representatives finally passed the same measure as the Senate. The process and the result prove that Otto von Bismarck, the first chancellor of Germany, was right when he said, “Politics is the art of the possible.” It certainly is not the science of the perfect.

There were some positive elements to the deal. Some of the tax policy of the past 11 years was made permanent. Also, the alternative minimum tax (AMT) exemption and the estate tax exemption were indexed to inflation, so they won’t need to be periodically fixed. Here’s a snapshot of what the deal achieves:



Government payments:

My back-of-the-envelope calculation says this will create approximately a $180 billion drag on the economy, which is significantly better than what it could have been. I believe the deal will favor dividend-paying stocks and multinational businesses focused on developing and selling equipment and software to other businesses but perhaps hurt some consumer-facing durable goods companies, which will be adversely affected by the payroll tax cut expiration.

Over the next three months, we’ll have at least three more opportunities to watch the thrilling back-and-forth and brinkmanship: The sequester postponement will expire in two months; the debt ceiling will need to be raised before the end of March; and the continuing resolution that has been funding the federal government because a budget hasn’t been passed in four years will expire in March. In terms of the political environment, Washington, D.C., sent a clear message to America: Happy new year…nothing’s really changed!

The views expressed are as of 1-2-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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