If the US falls off the so-called “fiscal cliff,” then the investors are anticipating stock market plunge in the state. The situation may further complicate if the White House is unable to knock a deal to increase the nation’s debt ceiling. However, the threat of default increases if the debt ceiling is not raised, and it may create a panic in the financial market.
According to the report of the market strategists, falling off the cliff may lead to automatic tax increase and spending cuts. However, they may adversely affect the consumers as well as the business sector.
Automatic tax hikes and stiff cuts in government spending are affecting the stock market. However, the stock market did not show any sign of collapse still now. The market has plunged lower and has become more volatile in this current scenario. If this situation continues for long, then it may lead to a US debt downgrade. U.S. Treasury Secretary Tim Geithner informed that the United States may precisely reach its debt limit by the end of the year.
The White House announced that unlike 2011, it may not negotiate the debt ceiling this year. In 2011, it led to the first-ever downgrade of the U.S. credit rating after the increase of the debt ceiling. Well, this time again, the government is compelled to increase the debt ceiling. However, the repercussion on the market is really intimidating.
In 2011, the market was exposed to huge losses during the period surrounding the debt ceiling fight. The stock market dropped as the bills were passed to increase the debt ceiling.
A huge tussle is expected between the Democrats and Republicans about the debt ceiling. Therefore, Jon Najarian, a co-founder of online brokerage TradeMonster.com, speculates it to be the greatest risk to the downside in January for the US economy.
However, Mr. President offered a proposal to avoid the fiscal cliff after a discussion with the congressional leaders. Obama told the reporters that its time for immediate action and he assured that an agreement can be achieved. The U.S. House of Representatives is planning to work through the holidays. In this economic scenario, Obama has proposed to maintain current tax rates for all.
Until now, the consumers are not paranoid by the fiscal cliff talks. On the other hand, recovery in the housing market and growth in the labor market helps to encourage consumers once again. But the lawmakers are required to knock the agreement deal to avoid fiscal cliff; otherwise the consumers may see the effect on the paycheck with the rise of the tax rates.
The option strategists marked an increase in the position of defense stocks to safeguard against the volatile economic situation. Spending cuts adversely affect the defense stocks like General Dynamics.
The government may come to an agreement in order to avoid the effects of fiscal cliff. However, the result may not help to satisfy the investors. There is no sign of improvement in the equity market. The equity futures dropped by 3.6%, and we did not see this kind of volatile market in 2008 or 2011. Due to lack of Republican support, the House Speaker John Boehner called off a scheduled vote on a tax-hike bill.
Well, the market may dwindle if the consumer confidence continues to take a hit due to fiscal cliff talks. Due to fiscal cliff issue, the consumer confidence fell incessantly in December.
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