The Truth About the Fiscal Cliff

by Hilary Kramer | December 31, 2012 11:12 am

It’s no secret that talk about the fiscal cliff has been everywhere. The media, especially, has taken the issue from a newsworthy topic to a sensational story. I’ve seen clocks counting down the minutes, panicked stories on the news, and dramatizations about what the fiscal cliff is and what will happen if we go over it on January 1.

I do want to make it clear that I still believe that Congress will come to an agreement. It may not be a permanent one, but they will be able to postpone the tax hikes and severe cuts. As I’m sure you remember, but back in 2008, during the financial crisis, Congress managed to pull it together and bailout the banks. They bailed us out once, they can do it again.

But I still think it is important to understand difference between the the facts and the myths. In particular, there are three myths that I want to debunk today. Take a look:

  1. We will fall off the cliff right away. This is false. It could take six months before the tax increases would become noticeable. I wouldn’t expect to see changes until March or April.
  2. The stock market will crash. Although the stock market will drop if a solution is not found, it will not crash. Don’t expect chaos. The world will keep turning and the market will adjust.
  3. Going over the fiscal cliff will mean doom and gloom. Going over the cliff certainly isn’t good for the economy, but the economy will eventually bounce back, and I expect housing to offset some of the problems since this sector is finally beginning to turnaround.

Myths aside, here is what is most likely going to happen:

  1. Taxes increase. There would be taxes on estates that cost more than $1 million, higher payroll taxes, income taxes, and an increased tax rate for everyone.
  2. Deep cuts. Dramatic cuts in defense, entitlement (Medicare and Medicaid), and unemployed benefits programs would kick in. The defense cuts would force massive layoffs for government workers in the defense programs, and the states and counties would also struggle.
  3. The stock market will drop. It will not crash, but it will go down. And, like always, the stock market will eventually go back up.

The fiscal cliff is a serious issue, and going over it would certainly put the U.S. economy in a tough spot. But I think that it is important to note that the world will not end if Congress cannot rally together and come up with a solution. In fact, there are still game-changing stocks that are still going to prosper desite of a struggling economy. The key is finding companies that are in significant new or growing areas that fulfill certain needs.

One great example is SeaWorld Entertainment, which may be a familiar name to you. SeaWorld is a new company coming to market that is always upping the ante in family entertainment. America’s theme parks attract tourism from all over the world, and SEAS is a big contributor to the sector, giving it plenty of room to keep growing.

In addition to SEAS, I also like Allot Communications (NASDAQ:ALLT[1]), Procera Networks (NYSE:PKT[2]), Proofpoint (NASDAQ:PFPT[3]), Spectrum Pharmaceuticals (NASDAQ:SPPI[4]), Service Now (NYSE:NOW[5]) and Team Health Holdings (NYSE:TMH[6]). I expect these companies to do well no matter what happens in the economy in the coming months.

Endnotes:
  1. ALLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALLT
  2. PKT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PKT
  3. PFPT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFPT
  4. SPPI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPPI
  5. NOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOW
  6. TMH: http://studio-5.financialcontent.com/investplace/quote?Symbol=TMH

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