The fiscal cliff just got steeper

Obama's re-election portends a big fight over the national debt and lots of volatility in financial markets.

By MSNMoney partner Nov 7, 2012 10:31AM

US NewsBy Rick Newman

There's less uncertainty on the political landscape. But there's now more to worry about.


For a short while, Wall Street seemed to be fantasizing about a strong Republican showing in the 2012 elections, which would have brought single-party control to a notoriously fractious and dysfunctional government in Washington, D.C. That's one explanation for why the stock market had a banner day as voters were heading to the polls, rising by nearly 1 percent on a day when there was little tangible news to justify the gain.


But after a seemingly endless campaign and $6 billion worth of political spending, Americans voted to reelect President Obama, keep Congress more or less the way it's been, and continue the divided government that's been in place for the last two years. Many analysts considered that a worst-cast scenario in terms of resolving the "fiscal cliff," the huge set of tax hikes and spending cuts set to go into effect in 2013 if Washington doesn't come up with a better plan.


Since averting the cliff would require some kind of compromise between Democrats who control the White House and Senate, and Republicans who control the House of Representatives, a continuation of the status quo suggests that the same spiteful partisan squabbling that already dominates Washington will suffuse negotiations over cutting the deficit and starting to pay down the $16 trillion national debt.


"A status quo outcome will be viewed as a disappointment, and markets may sell off somewhat in the short run," wrote David Joy, chief market strategist for Ameriprise Financial, in a brief analysis of the election's consequences. "It will be viewed as an outcome which offers the prospect for continued partisan bickering on a budget deal, and which increases the likelihood of brinksmanship on the fiscal cliff."


Many analysts assumed that a Republican sweep, including control of both houses of Congress, would have raised the likelihood of a deal to rescind most or all of the tax increases scheduled to go into effect in 2013—which amount to about $545 billion. But Obama wants to raise taxes on the wealthy, which Republicans have said they won't tolerate.


That portends a nasty standoff similar to the meltdown that occurred when the U.S. borrowing limit needed to be raised in the summer of 2011, and bitter partisan wrangling went till the very last second. The borrowing limit did get raised, but the needless 11th-hour drama—plus the collapse of a broader deal to corral the mushrooming national debt—led to the first-ever downgrade in the U.S. credit rating. Over the next month, the stock market fell by seven percent.


So it's little wonder that Wall Street expects more of the same when an even bigger set of deadlines hits at the end of the year. "In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle," investment bank UBS advised clients in a research note ahead of the election.


There are still plenty of ways that a divided Washington could steer clear of the cliff and spare the economy another unneeded shock. President Obama, who hasn't staked out a strong stance on deficit reduction, could grant House Republicans a few of their priorities—which mostly involve spending cuts—in order to reach a compromise. Chastened Republicans might show a stronger inclination to solve problems rather than scoring political points. Business leaders, who have been heavily lobbying for a solution, might finally bang some sense into the politicians.


But none of that will happen for a while, if it happens at all. In the meantime, brace for a few weeks that may be the bumpiest of the year so far. The election is over, but the fighting probably isn't.

More from U.S. News

Nov 7, 2012 1:33PM
I'm going to get some popcorn tonight and watch the new comedy channel: FOX NEWS!

Guess comedian,  Donald Trump.

          Seriously, I do not hate the republican party like some people do. I agree with a lot of the ideas and values they have but, the people on FOX NEWS are so arrogant, conceded, and full of them selves that they are giving the republicans a bad name.  I can only hope not all republicans are like FOX NEWS and "THE DONALD" or they are doomed!

Nov 7, 2012 1:32PM
A very sad day for America.  At least we can still pray....
Can we possibly get over the rhetoric and start working together?  The numbers prove that the American economy is growing inspite of the partisan bickering.  Just imagin what this country can do if we are working together instead of against each other.  Even Romney said that given the trajectory of the economy, it will grow over the next four years even if he didn't do anything.  If we work together it can grow even more. 
Nov 7, 2012 1:31PM
Wow a lot of angry men who can not see the forest through the trees.Obama won and now we have angry white boys who are just dumb
Nov 7, 2012 1:28PM
America will have to come to grips with the debt situation at least partially over the next few months, most reasonable investors have seen this coming and raised capital over the last few months. Those of you that gambled on a republican sweep   oops next time read the poles.  Raise capital now and trade this as a buying opportunity that will bottom over the next few months. Watch the news, when the speaker of the house starts talking about a compromise he can live with. You should be well into buying.  Already you are seeing companies undervalued in time the whole market will get there   unless congress surprises everyone and works together quickly.   This isnt armageddon its a chance to make money, maybe a lot of money
Nov 7, 2012 1:26PM

I love how the media is saying the stock market is a response to the fiscal cliff. LMAO. Yeah, nobody knew about the fiscal cliff yesterday.


I can just see if the stock market rebounds, the headline will be : "Market sllides due to fiscal cliff; everyone realizes Obama was re-elected and that everything is going to be OK. 1 million jobs saved as market recovers.

Nov 7, 2012 1:25PM
Hold on! Can you hear that tax payer money train comming to bail out the market today just watch and see......
Nov 7, 2012 1:24PM
What's the only thing worse than having another four years of Odumbo the clown? Having Jackass Joe as their backup plan!  It obviously CAN get worse! Good health Odumbo...
Nov 7, 2012 1:24PM
Some funny stuff - blaming Republicans for downing the Market.
Sorros and Buffett where pushing it up - they want their money back now so they can buy gold...
Nov 7, 2012 1:24PM

Wall Street will be wall street trying to vent and manipulate the market and play the government to go their way.


Time for the greedy people and corporations to wake up and embrace the incoming reality. The middle class is taking a stand.


Wall Street will become irrelevant like the Reublicans if they don't wake up and embrace the the incoming reality.

Nov 7, 2012 1:24PM

Grow up people.


As long as the Republican party refuses to even admit that the country's demography is changing they can't win national elections.


There are no blue states trending toward red. There are red states trending toward blue. This can't be denied. 


Stop going even further to the extreme right. Realize that the tea party tail is wagging the Republican dog. Nominate someone who doesn't have to pander to the extremists to get on the ticket and then look like such a flip flopper as he/she inevitably moves toward the center in the election.


There will be an election in two years. If the Republican party doesn't start looking more moderate as the population continues to change they risk further losses in the power chambers.


We are a nation of moderates. The Republican party needs to resemble the nation more.

Nov 7, 2012 1:23PM

Just shows the negitivity of Wall Street.

Get Positive, and so should our Congress.

Fix our problems not be the cause of our problems.


The Greedy, just want and want.  Spoil themselves and there children

they are all entitled. The hell with everyone else.

I see it every day on the road, the lady driving her Mercedes speeding

cutting off people, because she thinks, she is better than anyone else

entitled to do what she wants.


Wall Street grow up..  Do what's right for the country for a change.

Nov 7, 2012 1:23PM

To Empty, Pete, Money, This is What I Think, VL


Congrats.  You and your team put on a spanking.  I may disagree with you are certain principles, but I don't think you are sooo far out there (like that fking rtrd urlemmings) that you would want to harm America.  I'm hopeful for our country and OUR president, Obama.  Lets keep America great.


Mr. Krueger

Nov 7, 2012 1:23PM
Well this only shows you what kind of control all of Romney's buddies have on wall street and they are punishing the American people for putting the controls in place necessary to keep them in line.  
Nov 7, 2012 1:22PM
MSN - " There's less uncertainty on the political landscape. But there's now more to worry about"

Sounds about right... ...
Nov 7, 2012 1:22PM

GlennB et al write about "doing the people's will" as though everyone had the same interests.  Well, they don't, and that's why we (mercifully) have gridlock.  Yesterday's election changed just about nothing.


There still is a large faction that doesn't want taxes raised - it thinks the government will just spend more money badly, and trash the economy simultaneously.


There's still a class-envy faction that thinks that making the rich poorer without raising serious money will make everyone feel better.


How about a compromise?  This one will never happen, but it would shut up all sides for a few minutes.  Restore the Clinton tax rates - all of them, AND reduce spending programs to the percentage of GDP that they were in the beloved Clinton years.  If you want to change priorities, fine, but the total can't exceed 21% of GDP.


Any takers?  Not likely, right?  That's because there is no "will of the people" concensus.

Nov 7, 2012 1:22PM
 All you people do is worry, worry, worry and most of you are wrong.
Nov 7, 2012 1:21PM
Man I wish Fox Noise would re-enable their comment section. I'm sick of them coming here and spewing their inane rhetoric. Yeah we get it; you don't want a black man to succeed as president. It offends your inbred hillbilly ancestors. This is the beginning of the end of intolerance by the right. Eventually enlightenment will win out. It will take some time to relegate religion and bigotry to the sands of time, perhaps more than a thousand years but we will get there. Good luck human race, I'm crossing my fingers for ya :)
Nov 7, 2012 1:21PM









Nov 7, 2012 1:20PM
Obama's mantra- If your on foodstamps blame a millionaire
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