It seems that nearly every major news article over the past couple of weeks has been talking about the U.S. and its impending fiscal cliff. This “cliff” refers to the ending of several tax cuts (which will, upon their expiry, act effectively as tax increases) along with a number of major spending cuts by the U.S. government. All of this is set to happen on or around January 1st, 2013.
If left unresolved, these issues will combine into the perfect economic storm. It would force the average American household to become more cautious about spending, and at worst plunge the U.S. into a full-on recession. Also looming on the horizon is the next possible extension of the U.S. debt ceiling, which currently sits at $16.4 trillion USD and is predicted to be surpassed in February or March of 2013.
The U.S. has a history of pushing major financial decisions to the eleventh hour. In reality, no one actually expects them to default on national debt obligations or fail to reach a decision on changes to tax law, but the simple fear of these issues can cause significant market reactions.
Should a poor outcome occur, a recession by the world’s largest economy would inevitably pull the majority of the world’s economies down with it. Stephen Harper is actively seeking trade agreements around the globe, including most recently China and India, but with 75% of Canada’s exports currently heading directly south, a further slowing U.S. economy could have a dramatic effect on Canada. Mark Carney, governor of the Bank of Canada, says the fiscal cliff is the most imminent threat facing the Canadian economy.
Not surprisingly we’re already seeing the initial reactions from the stock markets, with large sell-offs happening both here in Canada and in the U.S. In the first day of trading directly after the presidential election, the TSX fell over 150 points, while the DJIA plunged over 300 points. Experts argue that this would have happened regardless of who won, as both candidates have diverging views of how to handle the country’s debt. However, the DJIA has since continued to slip, losing another 200 points to land at 12,800, while the TSX has been holding its ground around 12,200.
Though the U.S. will certainly have some tough times ahead, it isn’t all doom and gloom for Canada. A recent report by the OECD (the Paris-based Organization for Economic Co-operation and Development) predicts that Canada will lead the G7 nations in annual growth of its gross domestic product through the next 50 years, averaging +2.2% per year. In part, Canada’s wealth of natural resources is said to account for that growth.
What will all this mean for Canadian investors, and what can we do to prepare? First and foremost, stick to the plan. Continue to hold those big blue-chip dividend stocks, for the dividend income, even if the share price drops a little. As stock prices fall, now is the time to watch your favorite companies for the right time to enter a position, or to add to your current holdings. If it’s a solid blue chip company that’s been around for decades, it will still be there next summer when the dust settles. So take this opportunity to be patient, find the great deals and buy in on the dips. This will give your portfolio a nice bump when things rebound.
Readers, what’s your take? Have you been buying or topping-up, or holding cash and waiting for more sales?
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