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Will stocks fall off the cliff?

By Judy Martel · Bankrate.com
Monday, November 12, 2012
Posted: 6 am ET

Now that the election is behind us, national focus is zeroing in on the fiscal cliff, the Jan. 1 date when tax hikes and spending cuts automatically take effect. If Congress doesn't come up with a solution by then, investors will face more than higher taxes. There's the threat of a recession and a further drop in the stock market.

"The impact of various tax increases and reduction in, primarily, defense spending, is likely to reduce (gross domestic product) anywhere from 2.5 percent to 5 percent, based on most projections," says Brent Fykes, senior investment partner at GenSpring, a wealth management firm catering to the ultrarich. "Given the current low growth in GDP, the fiscal cliff could result in a recession during the first half of 2013," he adds. "That would most certainly result in a drop in the market."

Many are speculating that even if Congress doesn't come up with a solution by year-end, an economic crisis can be averted if it implements a plan in the first half of 2013. Fykes says in that case, the outcome for the economy and the markets will depend on what the plan is and how meaningfully it impacts the GDP.

The market already suffered a sharp selloff immediately following the election, signifying it hasn't yet priced in the possibility of a fiscal cliff, Fykes says, and has room to fall further. "The markets are still sitting near all-time highs, even with slower earnings growth from companies reported in the third quarter and reduced forecasts for earnings in 2013."

All of this uncertainty is creating a volatile stock market and leaving long-term growth investors worried about where to put their money. In these shaky financial times, it's more important than it ever was to be diversified -- not just among various equity sectors but also among fixed-income and alternative strategies.

Do you believe Congress will solve the fiscal cliff issues before the deadline?

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November 13, 2012 at 11:22 am

This admin has a new world record on scandals, from the BP oil spill reaction, Cambridge police incident, Fast & Furious and coverup, to the 3 or 4 in the news now (google Obama scandals). This news covers over the economic collapse that he is guiding us into. There is no resolution to the "fiscal clif" other than a more gentle downhill glide into a deeper recession over the next few years. Either we cut spending or engage inflation or both. Raising taxes does nothing but make it worse. Obamacare will destroy what is left of small biz.

November 13, 2012 at 9:58 am

obamacare, tax hikes, foreign policy, econony, what where people thinking of re electing obama. we are gonna suffer for the next 4 years and our what will be left for the next generation.

November 13, 2012 at 9:13 am

Kim. Amen to that. You hit the nail right on the head.

November 13, 2012 at 6:49 am

God, help us

November 13, 2012 at 12:22 am

The people in power don't really care about most Americans. Obama just wants to take money from hardworking people and give it to people who don't want to work.

November 12, 2012 at 11:07 am

The most likely scenario is more of the same: Kick the can down the road. Hopefully, this time there will be some provisions to get the budget deficit under control in the long run.