From an investment viewpoint, this tilts the asset class derby in favor of stocks over bonds and bonds over cash. Even as conditions improve, the Federal Reserve will continue to promote economic growth through job creation transmitted via low interest rates and bond buying programs.
-Mark Luschini, chief investment strategist, Janney Montgomery Scott LLC
Solving the fiscal cliff is a linchpin to any forward-looking statements, since it holds the key to determining what influence higher taxes and/or spending cuts will have on economic activity next year. We believe there is likely some barter that ultimately imparts a 1–1.5% haircut to GDP in 2013, not inconsequential given that third-quarter GDP registered a pace of growth of 2.7%, but better than the worse-case outcome of almost 4% scored by the Congressional Budget Office. But rather than the sluggish sub-2% growth that is left under our assumed compromise arrangement, we believe factors are in play that could lead to an acceleration in the economy that exceeds consensus estimates of 2.1% for the next 12 months.
Business confidence is weak as concerns increase over the prospects of the as-yet-unknown fiscal tightening. Consequently, investment in plant, equipment, and technology has been deferred. Over the last several quarters, contracting order activity has contributed to slowing manufacturing activity and influenced hiring decisions. Meanwhile, publicly traded companies are generating record profits and have sidelined nearly $2 trillion in cash. We expect the resolution to the fiscal debate will reduce uncertainty and lead businesses to resume spending. In fact, because of the underinvestment that has taken place, pentup demand could be released, causing a swift uptick in activity. That bodes well for the economy and some sectors, such as industrials and technology, which may be the recipients of demand being unleashed.