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After battling a mountain of opposition to win a second White House term, President Obama faces an even more daunting task — making sure the US economy doesn’t fall off the so-called fiscal cliff.
Newly focused on the looming tax hikes, investors yesterday sold off stock, resulting in the largest sell-off in the Dow Jones industrial average in a year. It fell 2.4 percent, or 312.95 points to 12,932.73.
The decline startled investors, which had enjoyed sold advances in 2012 as fiscal issues and Europe’s debt problems took a back seat to the presidential campaign.
But that is changing.
“It’s going to be very messy,” James Dunigan, the chief investment officer for PNC Wealth Management, told Bloomberg News.
“The wrestling around the fiscal cliff is going to leave a lot of bruises along the way,” Dunigan said.
The market maven believes a deal to avoid having the US economy go over the cliff will be reached, but that “path is not clear.”
The fiscal cliff is built on some $600 billion in tax increases and spending cuts scheduled to kick in Jan. 1 unless Obama and lawmakers can agree on a combination of spending cuts and measured tax increases.
Among the tax increases that would go into effect if lawmakers don’t act is a 2 percent hike across the board on payroll taxes. Spending cuts to the military and Medicare are also due.
“I think the stock market right now is worried about the possibility that there isn’t some kind of deal,” said Joe LaVorgna, an economist with Deutsche Bank.
But LaVorgna doesn’t predict doom and gloom. “I think we will avoid the cliff. There will be a meeting of the minds — or at least that’s my hope. The difference is this president isn’t running for re-election, and the Republicans aren’t trying to run him out of office.”
Complicating matters for investors is that Democrat Obama is facing the same Republican House he had to deal with in his first term.
“With a polarized federal government, we see little reason to increase the probability of avoiding the tax cliff,” Barry Knapp, an economist with Barclays, said in a note to clients.
Knapp yesterday slashed the bank’s price target for the S&P 500 index by 5 percent to 1,325 points from 1,395 on fears the US economy would go over the fiscal cliff.
But not everyone on Wall Street agreed that Armageddon is in the cards.
“The worst scenario is they let the fiscal cliff occur for a few weeks,” said David Kelly, an investment strategist with JPMorgan. “But in that last eventuality, the pressure . . . to come to a deal will be overwhelming.”
Still, investors can expect “a lot of tug and pull” until that happens, said Charles Gradante of hedge fund tracker Hennessee Group. “The markets are going to let [lawmakers] know they don’t like this stuff.”