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Kent Thune

Fiscal Cliff Impact on Your Mutual Funds and 401(k)

By December 30, 2012

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Until the past several trading days in the market, the fiscal cliff has been largely a media event contained to the political world.  As we end 2012 and enter 2013, the fiscal cliff can still transform into just a bump in the road if the vast majority of expectations are met.

Fiscal Cliff 2013: A Psychological Bump in the Road (For Now)

Broadly speaking mutual funds and 401(k) balances will have very minimal impact from the fiscal cliff, assuming politicians just continue being politicians, which is to say that they'll arrive at a solution that will neither help the US economy or hurt it anymore than usual.  In simpler terms, this whole political mess is primarily a game that will play itself out before any long-lasting damage can be done to Wall Street and spread to Main Street.

It's Mutual Funds 101: The broader diversity of funds and 401(k)s may receive a small dent or even a small gain in 4th quarter 2012 statements.  As I write this, stocks, as measured by the S&P 500 Index are down about 3% since October 1, 2012, and bonds, as measured by the Barclays Aggregate Bond Index, are about breakeven.  Therefore a mix of stocks and bonds, or a good hybrid fund, combined with dollar-cost averaging, would combine to create slightly-higher balances on statements.

More specifically, the fiscal cliff standoff will need to extend far into January or even February 2013 before it does enough damage to force a re-pricing of stocks significantly to the downside.  I say this because the worst case scenario, where all tax rates rise, including the middle class, is extremely unlikely.  The immediate impact of going over the fiscal cliff will not really be felt in the US economy until American workers have started receiving paychecks and business owners have begun paying estimated taxes.

Politically, both parties will simply be able to blame each other and then compromise in early January, at which time they can both claim they "lowered taxes" for 98% of Americans.

Before I digress onto a political rant, back to the original point: The fiscal cliff can be reduced to just a bump in the road for mutual funds and 401(k)'s because, once we pass beyond it, markets will rise again because there will have been no significant fundamental damage done.  Thus far the impact is psychological, which still is real, but not likely to be long-lasting. We will simply return to the good old days of a weak but growing economy.

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