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Like a lot of people, I’m electioned out and glad it’s over. In a recent conversation with political strategist Greg Valliere we discussed the country’s biggest hurdle now: the fiscal cliff, where automatically programmed spending cuts and tax increases meet at the end of the year. It’s front and center for Congress to get a deal done, and Republicans and Democrats face a complicated set of negotiations and compromises to make that happen. Greg thinks it will be an extraordinary period of “introspection, reflection, naval gazing and finger-pointing.” That’s a given, of course – but I do see some light on the horizon.

Conciliation Likely

It’s my understanding that the government has taken no steps towards changing tax withholding tables and will implement additional delays in other revenue generators and spending cuts for a period of time. That tells me that even government officials expect some sort of deal eventually.

To get a deal done in December is likely too much to accomplish in too short a time for Congress… They’re likely to do what they do exceptionally well: kick the can down the road – to something like the first or second quarter. Of course, business is reluctant to spend and hire and buy new equipment with all the uncertainty on taxes, and that uncertainty will persist without a deal.

If your objective is only higher marginal rates, it’s hard to get a deal. But if your objective is to improve or change the progressivity of the tax code, I think you can get a deal by limiting tax deductions or moving the threshold from $250,000 to $500,000 (to $1 million). I think there are many ways Congress can accomplish both things and both sides can get something out of it.

Optimism on the Economy and the Markets

It looks as if third quarter GDP is going to be revised upward from around 2% to 2½%, according to the Commerce Department. Furthermore, fourth quarter GDP is starting to look like 2% to 2½% as well. And that’s in the face of businesses hesitating and holding off on hiring, investing and buying equipment.

In fact the economy, even after four years of recovery, is only beginning to look like a traditional recovery in the sense that auto sales and housing are beginning to show some signs of improvement. It’s a classical recovery when the interest-rate sensitive sectors begin to improve, and we are we seeing that now.

In October, for example, even with a few days cut off due to Hurricane Sandy, auto sales were just as good as September’s. And if it weren’t for the storm, they would have been much better and that would have been three or four months of increasing auto sales on top of better housing numbers.

So all in all, I think the underlying trend in the U.S. economy is better, and if we begin to put some of these uncertainties behind us – the election was one of them – we’ll see the markets and the economy begin to improve.

Filed under: Contributors, Equity Market Insights, Fixed Income Market Insights, Ken Taubes, Macroeconomics, Political