The New View From the Cliff

 | Jan 04, 2013 | 9:30 AM EST
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The implications of the agreement reached to avoid the fiscal cliff are being sifted through various filters and prisms: the political implications, the possible macro-economic ramifications, and, of course, the likely impact on businesses, and by extension, the stock market.

Interestingly, the business/market impact is probably the clearest and least ambiguous of all. The down-to-the-wire deal represented the triumph of a popular demand for clarity, certainty, and fundamental prioritizing of the public welfare above any particular political or even ideological perspective. Faced with a paralyzed business community, and an about-to-be-shell-shocked taxpayer base (who would have punished the economy with a spending meltdown), both sides of the aisle elected to grit their teeth and come to an agreement.

For much of the lead-up to the end of 2012, the market seemed fairly confident that the adults would indeed carry the day. It was only in the immediate period before a deal was announced that concerns about our leaders' ability to make something happen crept in. Political dysfunction is still alive and well in Washington.

Perhaps the memories of the prior embarrassment attending the securing of TARP in 2008 and the last debt ceiling authorization in 2011 made this time seem better.While there was no conceivable reason for this to happen on Jan. 1, 2013, this past go around still looks better than the previous experiences.

From the stock market's perspective, the fact that this could be done, and done in a timely fashion (who would have thought that the "very last minute" could be conflated with "timely fashion?"), is of great comfort. It indicates that government leaders, although probably in spite of themselves, were ultimately attentive to real world economic and business realities.

It also offers hope that the various slugfests still to come (e.g., spending cuts and debt ceiling limitations) might also be resolved without offering up the American economy and the American people as collateral damage in a winner take all political struggle.

Such confidence is extremely significant. From a business perspective, we now have the clarity with which to make plans and decisions, knowing that key tax and fiscal considerations can be taken into account and not guessed at. While the agreement might not be in the best interests of the overall economy, at least reaching an agreement removed the very real possibility of a self-inflicted economic wound whereby businesses might have postponed any expansion in the face of uncertainty.

From the market's perspective, there is now clarity about capital gains and dividend tax rates, which makes it much more feasible to factor in these key investment considerations. Perhaps even more importantly, the recent agreement removes some of the fear that the political process will dominate the perception of market valuations. If the wildcard aspect of governmental policy can be taken off the table of market drivers, there is a greater chance that more fundamental analysis can set the tone of the market going forward.

Finally, the rancor of the entire process raises the prospect of more gridlock going forward on issues not determined to be life or death for the economy. In this regard, the market is likely to be pleased, as gridlock in Washington is usually seen as a plus.

There will be new rounds of contentious consideration in the next few months. Hopefully, the fact that an agreement was reached on taxes and its positive reception by the public and the financial markets will encourage Congress and President Obama to again agree on a constructive compromise and will give the market some confidence to believe that these other issues can be handled without a self-destructive meltdown.

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