Markets Think “Fiscal Cliff” Won’t Happen, But it Could…

Markets Think “Fiscal Cliff” Won’t Happen, But it Could…

Investors could suffer significant losses in the coming months as Washington moves closer to the “fiscal cliff” of budget cuts and tax hikes, analysts at Blackrock warn in a new report.

“Markets have not priced in the fiscal cliff and assume [Federal Reserve quantitative easing] will drown out other factors,” the report states. “For now all we can say are markets appear to underestimate: the potential for panic in the run-up to the cliff; the possibility of the nation falling off the edge; the cliff’s impact on economic growth.”

The fiscal cliff refers to the combination of automatic spending cuts and tax increase scheduled to hit in January. The biggest pieces are the expiration of George W. Bush-era tax rates and the sequestration of discretionary funds mandated by the failure of the 2011 super committee to strike a deal.

Blackrock says Wall Street remains convinced that Congress and President Obama will find some way to replace the cuts in the lame-duck session, but insiders in Washington say going over the cliff is a real possibility.

The most likely election scenario, as of last week when the report was drafted, is an Obama win and GOP control of the House. In that scenario, it is likely that the country could go over the cliff. Even if that scare forces a compromise, there would be further wrangling next year over the debt ceiling, which will need to be raised again.

If GOP nominee Mitt Romney wins, Blackrock also sees a real chance the fiscal cliff being is reached, but Romney then telegraphing retroactive fixes once he comes into office.

Source: The Hill