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Fiscal Cliff: No Grand Bargain, But Enough for Now

January 7, 2013

by Joanna Shatney

of Schroders Investment Management

Although the best case scenario is off the table, US markets are breathing a sigh of relief that the tax cliff has been averted – at least for a few more months. The final package holds enough for both the bears – given that we will have to revisit the fiscal worries in the next few months – and for the bulls – who believe that the near-term risks have been pushed aside.

It has been our belief that the cliff would be manageable and that as long as the wall of worry continued to exist, US equity markets should continue to move higher in 2013, given low expectations and low historical valuations.

The current bill presents some pros and cons: the bill effectively extends the majority of the Bush tax cuts, while placing greater tax burdens on higher income earners including higher marginal income tax rates, and higher taxes on capital gains and dividends. However, we are slightly worried about the payroll tax holiday that was not extended; a potential hit to lower income earners. These increases in taxes, albeit smaller than the cliff event itself, should still crimp GDP growth in the first quarter.

The main overall concern is that the situation is still not resolved. In November and early December, there were some hopes that the year-end deal would incorporate some discussion on spending cuts and the budget deficit. However, both have essentially been pushed to the end of February/early March for discussion, which creates additional worry for global markets.

Estimates of the necessary spending reduction are largely unchanged: targeted at around $3.5-$4.5 trillion. Given how contentious the last several discussions have been and how they have gone ‘down to the wire’, we are assuming these discussions will not be easy either.

Important Information:

The views and opinions contained herein are those of the Joanna Shatney, Head of US Large Cap Equities, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This newsletter is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument mentioned in this commentary. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Information herein has been obtained from sources we believe to be reliable but Schroder Investment Management North America Inc. (SIMNA) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions.

Past performance is no guarantee of future results.

Sectors/regions/companies mentioned are for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties.

Schroders has expressed its own views and opinions in this document and these may change.

The opinions stated in this document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized.

Schroder Investment Management North America Inc. (“SIMNA Inc.”) is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the “Schroder Funds”.) Shares of the Schroder Funds are distributed by Schroder Fund Advisors LLC, a member of the FINRA. SIMNA Inc. and Schroder Fund Advisors LLC. are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Further information about Schroders can be found at

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