US Fiscal Cliff and Its Effects on US and Canadian Stocks

The looming US fiscal cliff is expected to affect the market badly this week as well amidst the uncertainty of whether politicians can come up with a proposal to deal with this financial crisis which may well lead US to another recession and cause problems for the entire world economy or not. According to Andrew Pyle, who is an investment adviser for ScotiaMcLeod, if no compromise is reached soon or even if no such indications are received, that will definitely have a big impact on the market. Incidentally, the holiday shopping session is starting this Thursday on Thanksgiving and investors are anxiously gauging the shoppers’ confidence. There will be more reasons to worry if the sales volume doesn’t reach the expectations.

Toronto Stock Exchange (TSX) has already gone down by 3.9% since the conclusion of 6th November US President election. It is feared by investors that the resource heavy market of Toronto will suffer big time if the economic growth slows down. If the demand of metals and oil gets to a lower level that will obviously put pressure on the energy and mining stocks. The Dow industrial average has also fall down by 5% because of the worry all over on higher dividend.

Last Friday, Congressional Leaders had a meeting with Barack Obama, the US President and after it was finished, the leaders stated that they are happy with the discussion and they are confident of a possible solution. This definitely was a bit of relief, but, still, the market has not responded much to this. Many feel that US politicians will definitely come out a solution that will help the country recover from this upcoming fiscal cliff. But, that obviously does not mean that investors will not react to hints or indications of the market being affected, at least for the time being.

According to some financial analysts, common people of US believe that the country currently is in a better shape than it was 5 years ago. The recently released Consumer Sentiment Index from University of Michigan probably supports their views too. However, if the high-earners are still under the fear of the possibility of tax hikes starting from 2013, they most likely will buy less. This will definitely have an impact on the market as whatever these high earners buy is a big chunk of the total sales volume during the festive season. That definitely marks a key element loss when it comes to consumer confidence.

This upcoming fiscal cliff may not only reduce the number of customers and sales for the retail owners. At the same time, as a business house, they themselves will have to pay the high taxes if the initial decision is actually implemented in next year.

When it comes to Canada, there is some good news on the retail front though. In August, the sales rose by 0.3%. According to reports, in September, the sales volume increased by 0.5% more. This may be regarded as a positive sign, at least for Canada’s economy, but, it is still to be seen how the sales volume is affected during the last 3 months of this year.

It’s all not gloom for US either. The housing sector is doing pretty good and the number of foreclosures has also gone down. Housing starts in October is estimated to come at an annualized rate of 840000 which is less than what it was in September (872000).

This week, investors probably will be playing it safe. They will wait to see if some compromise action is taken by the US Government or not. The market may go down a bit or go up, but, no significant movement should be seen, be it US or Canadian market, at least for this week, unless some extraordinary event takes place.