What is the fiscal cliff and how will it affect your trading?

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May 30, 2013 by tradersnote

When you hear people refer to the ‘fiscal cliff’ the dramatic phenomenon to which they refer is the decision by the US government to increase tax rates and, at the same time, decrease government spending. This took place in January 2013. The result of the fiscal cliff, the Congressional Budget Office predicted, would be a ‘mild recession’ in 2013 with better employment prospects and economic growth in the following year. The fiscal cliff was obviously met by those working in financial markets with huge concern, due to the uncertainty it posed in the short-term.

It is worth pointing out that the fiscal cliff was not a new, sudden change overnight. Various laws were passed, during the 2010-2012 period, which increased government revenue and decreased spending. Similarly, concerns for the economic growth of the US are nothing new. Since the global recession took hold in 2008, traders have faced many periods of uncertainty and volatility on the markets. In the period of 2008-2013, there has been no long-term, stable recovery announced. The US fiscal cliff was the next shock for traders, but this latest shock was feared to halt all economic growth.

So how has the fiscal cliff affected how trading works and what opportunities are available? The role that the US can play on global markets is not as certain as it once was. The US workers affected by the removal of previous payroll tax cuts now take home less pay. Many business have seen their tax breaks and tax cuts been removed. Even businesses that are not struggling in the current economic climate now have less capital available to reinvest into expansion and similar projects. Therefore despite the intentions for the new laws to create significant growth in the long run, many fear that the fiscal cliff will simply the push the US into another recession.

This risk of the fiscal cliff therefore creates enough uncertainty to make traders nervous. Any resolution on a way forward for the US will depend on how much either the Republicans or Democrats are able to compromise; Republicans wish to cut taxes, Democrats wish to raise them. As you can imagine, this waiting game creates significant uncertainty for traders.

However, despite these policies reducing the spending power of the US, traders should not shy away from the global market. The fiscal cliff is something to be aware of and the reaction of the US is a situation to monitor. However, this does not mean that the global market has lost all its action, by any stretch of the imagination. Indeed, those traders who are fans of shorting may well spot an opportunity brought about by the fiscal cliff, if they can find the right timing. Traders and investors that monitor the US economy, employment rates and work out how different sectors are affected will be able to stand a good chance of protecting themselves against the subsequent increased uncertainty created by the fiscal cliff.

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