Wall St slumps on 'fiscal cliff' concerns

Last updated 09:38 09/11/2012

Relevant offers


Dreamworld accident: Without bonus, Dreamworld boss gets half her predecessor's pay - and he didn't even work "RIP VINE #GoneTooSoon": Fans reel at the news Twitter is shutting down Vine Donald Trump believes the United States can get US$1 trillion in new roads, for free Ardent has failed at every step over the Dreamworld tragedy – except deciding to reopen John Key's time in India was 'short and sweet' but will be chalked up as a success Samsung logs 17 per cent drop in profit after phone recall Tesla Motors surprises with first quarterly profit in three years Ardent to re-open Dreamworld for normal business on Saturday Snapchat planning to raise billions in IPO Ardent chief Deborah Thomas to face bonus scrutiny after Dreamworld accident

Worries that Washington will be unable to avoid the government spending cuts and tax increases known as the "fiscal cliff" drove the stock market to its biggest drop this year.

On the day after, big investors warned: Prepare for more turbulence.

"Difficult times are probably far from finished for the stock market," said Liz Ann Sonders, chief investment strategist at the brokerage Charles Schwab.

Sonders said the election heightened fear that Congress and re-elected President Barack Obama won't reach a deal by Jan. 1, when the tax increases and budget cuts begin to kick in.

If they are allowed to take full effect, the cuts and tax increases will total about US$800 billion (NZ$981b), or 5 per cent of GDP, in 2013. Economists say they could knock the US economy back into recession.

Investors hope Congress and the president can reach a deal by mid-December, before Congress breaks for Christmas. House Speaker John Boehner said that Republicans were ready to "find the common ground that has eluded us."

Many big investors fret that an agreement will prove difficult because the political landscape hasn't changed much: Obama returns to the White House, Republicans keep charge of the House and Democrats still hold the Senate.

"We're going to have the same polarised dynamic that has tied Washington in knots for the last two years," said Mike Townsend, vice president of legislative and regulatory affairs for Schwab.

A battle would probably mean trouble for financial markets.

Barry Knapp, the chief US equity strategist at Barclays, has lowered his year-end prediction for the Standard & Poor's 500 index by 70 points to 1,325. That is 69 points below where it ended Wednesday.

In a note to clients, the usually optimistic Knapp said the election "confirms the picture of a polarised federal government." The major players in Washington kept their jobs, he said, "the worst outcome for the fiscal cliff negotiations."

Some of Wall Street's strategists take an even grimmer view. David Kostin, chief .. equity strategist at Goldman Sachs, has forecast the S&P 500 will hit 1,250 before the year is out.

Sonders said more stock-market drops could push Congress and Obama into an agreement. It may look like the bruising fight over raising the government borrowing limit last year, which rocked financial markets around the world and led S&P to strip the US of its top credit rating.

"I don't think it will be as volatile as last August," Sonders said. "We're not going to try and game what's going to happen. But I do think that, whatever happens, it's going to be at the 11th hour."

Ad Feedback

- AP

Special offers

Featured Promotions

Sponsored Content