First, looking at the late December retail sales figures, it looks like consumers ignored the political grandstanding and kept right on spending. In spite of the uncertainty, and potential anxiety, shoppers were not so put off that they stopped spending.
Second, most of the “fiscal cliff” drama is now behind us. I think we’ll find that there was more (negative) impact to the economy during the 4th quarter, than there will be in 2013. The melodrama was costly. Economic activity did slow as the year ended, but now there are some rules for income tax planning and estate planning that can form the basis for decision making in the future, so maybe it will allow investors to begin making decisions, once again, and start moving forward. We almost hit stall speed during 3Q 2012. Personally, I am really happy to put 2012 behind me.
Third, it appears that Congress has re-learned how to compromise. Rather than letting extremists hold Congress hostage, the Administration (Biden, mostly) and Congressional leadership figured out how to find some agreement near the center, involving both sides of the aisle, in order to forge a majority. Previous administrations haven’t had such difficulty doing this, but the agreement surrounding tax hikes was the closest thing to a traditional compromise that we’ve seen in at least four years. That is, after all, how Washington D.C. is supposed to work. I thought that they’d forgotten. Maybe now they can repeat the process and come to some agreement on the spending reduction side of things.
Fourth, most of the tax rates determined are “final.” The accountants have been dealing with temporary estate planning rules since 2001. Many of the rules established in the fiscal cliff negotiations are actually supposed to be permanent. Wow. What a concept. The Alternative Minimum Tax (AMT) fix, indexation, is also permanent. It’s great to have some sense of finality to the negotiations.
Fifth, in my opinion, the GOP was more successful than I would have predicted. Especially given that they lost the election in November, so taxes were bound to go up, the impact of these tax increases negotiated over the New Year holiday are relatively limited. Given a trillion dollar annual deficit, if the tax increases account for roughly $60 billion (only 6% of the gap), that is pretty minimal. If the rest of the gap gets filled from spending reductions (Ha!), then that would be about $16 spending reduction for every $1 of tax increase. In reality, I think the deficits will continue ad nauseum, but the basic point remains; given the size of the deficit, the extent of the tax increase was pretty minimal.
There are plenty of things not to like about the upcoming potential for a constitutional crisis related to the debt ceiling debate we’ll be hearing over the course of the next few months. Still, there are a few good things that came out of the final package that will help investors going forward. It doesn’t hurt to notice them, too.
Addendum(dtd 1/7/2013): Fidelity Investments just published a good summary of the recent changes. Let us know if you would like us to e-mail you a copy of their Crisis Averted report.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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