Fiscal Cliff Avoided in Poll Seeing Market Gain Deal
Three out of four global investors expect President Barack Obama and congressional leaders to reach a short-term agreement to avert more than $600 billion in spending cuts and tax increases scheduled to begin on Jan. 1.
Only 6 percent of investors anticipate a political impasse that would send the U.S. economy over the so-called fiscal cliff and into a recession, according to a Bloomberg Global Poll conducted on Nov. 27.
“Both sides understand the importance of striking a deal, increasing taxes and cutting entitlements,” says Richard Salerno, director of fixed income for Kovitz Management Corp. in Chicago, in a follow-up interview. “The market just wants to know the rules going forward so they can move on and begin to lift us out of our fiscal mess.”
The survey of 862 Bloomberg customers who are investors, traders or analysts found that 40 percent expect financial markets to rise after a short-term tax-and-spending deal. An additional 28 percent forecast no significant market reaction while 26 percent say markets would fall, seeing a short-term deal as delaying an unavoidable day of reckoning with the country’s finances.
On Nov. 20, Federal Reserve Board Chairman Ben S. Bernanke, who enjoys a 65 percent approval rating in the Bloomberg poll, warned that failure to reach an agreement before the end of the year “would pose a substantial threat to the recovery.”
White House and congressional negotiators are seeking to reach a framework deal by year’s end setting targets for tax- revenue increases and spending reductions. Both sides have spoken of a so-called grand bargain that would carve $4 trillion from projected deficits over the next 10 years.
Investors are skeptical such a sweeping accord can be reached, with just 7 percent calling it the most likely outcome and 50 percent predicting a package that “moderately reduces the deficit over 10 years.” An additional 38 percent expect no significant cut in the federal government’s red ink.
“The problem is fundamentally attributable to the difference in political philosophy,” said Kenichi Katsuhara, a trader at Aozora Bank Ltd. in Tokyo. “That’s why it is really hard to bridge the gap.”
Investors’ confidence that the U.S. will turn back before toppling over the fiscal cliff is part of a broader mood lift in the wake of the Nov. 6 elections.
By a margin of 52 percent to 46 percent, those surveyed said they were optimistic about the impact of the president’s policies on the investment climate. And by 51 percent to 40 percent, they said his re-election was good for the financial markets. Both results represented a sharp gain from the previous Bloomberg Global Poll in September.
American investors, however, remain overwhelmingly negative about the president, with just 30 percent describing themselves as optimistic and 68 percent saying they are pessimistic.
“While the goals of the president’s policies are well- meaning, the actual impact has been and will be damaging to our economy,” says Uzi Zimmerman, portfolio manager of Ventura Capital Management LLC in Los Angeles, citing the health-care overhaul and the Dodd-Frank financial-regulation legislation.
Outside the U.S., investors endorse the president’s policies by a 65 percent to 33 percent margin, according to the quarterly survey.
That split also is reflected in approval ratings for the president and House Speaker John Boehner, an Ohio Republican. Obama draws an overall favorable rating from 55 percent of investors and unfavorable marks from 42 percent, while Boehner gets a favorable rating from 33 percent and an unfavorable response from 38 percent.
On the president’s home turf, it’s a different story. Just 26 percent of U.S. respondents say they approve of him, while 73 percent disapprove. U.S. respondents approve of Boehner by a 54 percent to 43 percent margin.
Perceptions of the health of the U.S. recovery also vary geographically. Forty-six percent of investors say the U.S. economy is improving, up from 34 percent in September. The percentage of those seeing deterioration in the rebound was almost unchanged from the previous Bloomberg poll.
Among non-U.S. investors, 53 percent say economic growth is getting better compared with 34 percent of their U.S. counterparts.
A particular bright spot is the housing market, which was the epicenter of the financial crisis and subsequent recession. Investors say they’re now certain the housing recovery is for real, with 62 percent saying they expect house prices to be higher in six months compared with 9 percent who expect a renewed decline. In September, 46 percent predicted higher prices while 14 percent said they would fall.
U.S. investor angst may be related to the likelihood of higher income-tax rates for the nation’s biggest-income earners. By a margin of 88 percent to 7 percent, investors say taxes are going up.
Respondents to the Bloomberg poll also back the president’s view that higher taxes will help rather than hurt the economy. Fifty-one percent say returning top marginal tax rates to Clinton administration levels will help the economy by shrinking the deficit while 35 percent say it will damage growth.
Only 35 percent of U.S. investors say higher taxes will help compared with 60 percent of those outside the U.S.
“I don’t think these tax increases will hurt,” says Philippe Giordan, head of investments for KBL Monaco Private Bankers and a professor of finance at the University of Paris Dauphine. “Recovery will first come from real estate and mass consumption, which will not be affected by limiting tax cuts for the 2 percent richest.”
As of Jan. 1, a new 3.8 percent tax on unearned income designed to help pay for the president’s health-care law takes effect. Investors are taking one or more actions in response: 25 percent are taking profits; 13 percent are moving into tax- favored investments such as municipal bonds; 11 percent are selling dividend-paying shares; 9 percent are exercising stock options and 38 percent are standing pat.
Nessan O’Carroll, Mizuho Corporate Bank’s co-head of derivative products in London, says he doesn’t expect “significant reallocation of investment outside the U.S. or a significant hit to entrepreneurial efforts by wealthy people” affected by the tax increases.
The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. The poll has a margin of error of plus or minus 3.3 percentage points.
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