Don't Get Caught on the Wrong Side of the Fiscal Cliff Trade
Diane Swonk, the chief economist at Mesirow Financial is optimistic that with the cliff in the rear view mirror, the U.S. economy may post strong growth by the end of 2013.
While Swonk sees the prospect of 3.5% to 4% growth, those figures are expected to hit in the back half of the year. She goes on to note on Twitter that the uncertainty of the deal did have a fundamental impact on holiday season retail sales.
"Washington adding insult to injury by not creating level of certainty; saw impact in holiday spending," wrote Swonk on Twitter.
So what risks remain?
Notably, the Tax Policy Center calculates that over ten years, Wednesday's package will add nearly $4 trillion to the U.S. budget deficit. Prior to the deal, ratings agencies like Moody's warned of ratings downgrades on any resolution that doesn't solve the government's budget imbalance over the long run. A protracted debt ceiling standoff could also force ratings agencies into action, as they did in 2011.
Any ratings downgrades would hammer financial sector shares, meanwhile uncertainty leading into year-end has cooled M&A, trading and underwriting volumes that are key for Wall Street profits. "With little prospect of any meaningful action to address the medium-term budget problems, we suspect that the US will suffer further credit rating downgrades this year," writes Paul Ashworth of Capital Economics, in a Wednesday note.
On Wednesday, Moody's said in a note that further measures to lower future budget deficits will be needed to upgrade the U.S. government's debt outlook from 'Negative' to 'Stable,' where the prospect of a downgrade would recede as a threat. Moody's calculates that Tuesday's deal would cause the government debt-to-GDP (gross domestic product) ratio to rise to 80% in 2014 and stabilize at 70% of GDP for the next decade, an unsuitable debt dynamic for an Aaa rating.
"The debt trajectory resulting from this process is likely to determine whether the Aaa rating is returned to a stable outlook or downgraded to Aa1," wrote Moody's, in a note that reiterates the agency's September outlook and stresses an expectation that debt ceiling wrangling will prompt spending cuts.
Meanwhile, retail sales-exposed names like Apple and Saks may yet suffer from tax hikes on the wealthy and a big payroll hit for most workers.
"If 2013 were to be a "normal" year, U.S. equity returns would likely be good, but not great, as the S&P 500 would record a gain in the mid-to-upper single digits," writes S&P Capital IQ chief equity strategist Sam Stovall. "As we enter 2013, we already know that this will be anything but a normal year," Stovall adds.