The Stock Market Is A Wild Card
Congress and the White House can significantly soften the initial impact of the 'fiscal cliff' even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets' reaction, which possibly could be a panicky sell-off that triggers economic reversals worldwide.
The stock market's unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff. A chief fear is that Wall Street would be so disgusted or dismayed that stocks would plummet based on the outcome of negotiations in Washington.
The so-called cliff's recipe of major tax hikes and spending cuts can actually be a gentle slope, because the policy changes would be phased in over time. Washington insiders say Congress and the White House would move quickly in January or February to undo many, but not all, of the tax hikes and spending cuts.
Financial markets, however, respond to emotion as well as to research, reason and promises. If New Year's headlines scream 'Negotiations Collapse', an emotional sell-off could threaten hopes for continued economic recovery.
One thing I do know to be a fact after years of trading stocks myself, is that nobody can predict the markets. Is an agreement or stalemate all ready priced into stocks? That's the million dollar question.