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 12:31PM
"What the people who voted for Obama don't know is, if the market takes a dive , unemployment will rise. Then who will they blame."

Black Sabbath (I hated that band), They will blame the Republicans for putting up roadblocks everywhere they can.  They already do blame them, unless you've had your head up your as* the last 2 years.
Nov 7, 2012 12:31PM
Dow is down 337 points and falling.
Nov 7, 2012 12:29PM
Anarchy in the US government will prevail for 4 more years.
Nov 7, 2012 12:29PM
I understand the disappointment but I encourage a better spirit.
If you choose to watch Fox News, your depression could become severe.
It's not the end of the world. We have been through worse.
We can weather this storm too. 
Let's face it Mitt was the last man standing in the primary and the first choice of very few.
It wasn't the bleeding heart liberals fault that the GOP has put up weak candidates the past 8 years.
The message was fractioned. The only thing that unified the party was opposition to Obama.
Better to take a walk in the sun and sing a happy song. 
Nov 7, 2012 12:29PM
obama will wait and wait and wait. and do nothing in the end. anybody remember bengazi?
Nov 7, 2012 12:28PM
those that live off the money of those that work may have elected their savoir but it will ruin the country. all we have to look forward to now is total anarchy and obamas attempt to take over the government and install himself as the new adolph hitler.
Nov 7, 2012 12:27PM
The days of Big balloted Republican borrow and spend policies are over for now, 4 more years without massive deficit increases like during the Bush years, no more tax cuts for the rich, while the middle class gets socked in the jaw, a true victory for the people of America and a defeat for Big Government.
Nov 7, 2012 12:27PM
The East Coast took a left hook from Sandy, now here comes the right upper cut from the North Easter. These are blue states. See how much help they get from Obama now.  Is this Karma coming back to haunt them.
Nov 7, 2012 12:26PM
This is a GREAT day in America.  The right people have won against the most ignorant this country has to offer.

God willed it!

Nov 7, 2012 12:25PM
Thieves on Wall Street...say GOODBYE to your ill-gotten gains!
Nov 7, 2012 12:24PM
The unspoken, but often hinted at threat during this election has been that if Obama were re-elected, the Republicans would shoot the economy in the head and toss the body over the Fiscal Cliff, purely out of spite. After all, we can't have an economy thrive under a Democrat President! That would never do.

It remains to be seen if the Republicans are willing to carry this threat through even though the sequestration axe, hacking with abandon across the entire GDP, would also gut their beloved military spending. If this is to be resolved, BOTH sides must be willing to bend. The Dems must be willing to see cherished programs such as PBS slashed AND Republicans must be willing to see taxes raised on the ubar-wealthy. Unless BOTH sides are willing to compromise (that means you too, Republicans!) we are heading towards a second world recession at a time when we are finally seeing sunlight after the first. 

The cancer here is not in the Executive branch of Government. It is in the two houses of Congress. The one thing America can not afford is four more years of trying to make Obama a one-term President. That battle is over, the GOP lost. They need to get over it and quickly so our Nation can move forward and thrive again. Will the Republicans play ball? That remains to be seen. Please, do it for the children.

Nov 7, 2012 12:20PM

What the people who voted for Obama don't know is, if the market takes a dive , unemployment will rise. Then who will they blame.

Nov 7, 2012 12:19PM
How quickly all of you forget that the Republicans and Bush got us into this mess...
Nov 7, 2012 12:19PM
"This is really  a sad day for the country. Those who voted for Obama will regret. Think unemployment is bad now, just wait. A lot of union people will be losing their jobs. And I say @@@@ them."

Don't you realize, this is how you lost the election.  You tried to scare people with these speculations that aren't worth sh*t.
Nov 7, 2012 12:14PM

It appears we have another Flori- DUH moment in Miami/ Dade county.

Even though I live in Volusia county, I would like to offer my apologies on behalf of all Floridian voters to the rest of the country for the Idiots running those polls. (WHAT'S WRONG WITH YOU GUY'S IN MIAMI/ DADE ?)


If New Jersey & NYC can have  smooth polling stations amidst the storm troubles- You have no excuses!!

Nov 7, 2012 12:13PM
America will never be destroyed from the outside. if we falter and lose our freedoms, it will be because we destroyed ourselves.

Abe Lincoln

Nov 7, 2012 12:10PM
If the republicans let us fall of the cliff then yes they are heading us to decline like Greece.
Nov 7, 2012 12:10PM

We are Fuc%#d!!!!!!!!!

We working few better get ready to give everything We've worked for all their lives to pay for the ones who won't, because the group of the ones who won't just got a hell of a lot bigger last night...

We now have a welfare nation of deadbeats who vote for a living rather than work for a living.

Its a sad day in America and the end of America.

Nov 7, 2012 12:09PM
The Republican House is next, if they don't compromise (and compromise hard).  The Tea Party is DEAD.  they could have thrived if they had only taken the Grand Bargain.  They didn't and you can see what happened.

Stupid is as stupid does.

Nov 7, 2012 12:08PM

Just bought $40,000 in the market. This little tantrum by the 1% is a great money making opportunity. Woo Hoo!

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[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).

Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More


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