Breakout

Buy the Dips Ahead of the Fiscal Cliff: Jeff Saut

Jeff Macke
Breakout

Though curiously absent from much of the presidential campaign rhetoric, the Fiscal Cliff is casting an even longer shadow over the economy. The list of tax hikes and spending cuts set to kick in at midnight on December 31 include an end to payroll tax cuts, tax breaks for businesses, a shift in the alternative minimum tax, and an end to Bush tax cuts from 2001 to 2003.

As per the debt ceiling agreement, automatic spending cuts to over 1,000 programs, including Medicare and defense, would be triggered simultaneously.

Pretty wonky stuff, but the upshot is this: If nothing is done to avert this laundry list of changes, the economy is likely to get very ugly, very fast. Whether they think a last-minute agreement will happen or not, prudent businesses are delaying capital improvements until they get more clarity.

What's smart for companies may not be the best call for investors. Jeff Saut, chief investment strategist at Raymond James — a man who has lived in the Beltway and been cultivating relationships there for years — says the worst-case scenario is extremely unlikely to unfold. Even in Washington D.C. no one is foolish enough to put the economy back into a recession out of foolish pride.

The Senators have been meeting in semi-secret, beating out the details, Saut says. The odds on an outcome by the end of the year, in Saut's mind, is that the Bush tax cuts get extended but the temporary payroll tax cut, which Saut says no one really understands, will end. On the spending side, Saut thinks the "mandatory spending cuts" will somewhat, paradoxically be delayed.

If that all sounds implausibly rational, Saut suggests that you get used to it. "The surprise going forward is that we're going to elect smarter policymakers and thus get smarter policies," he says in the attached clip.

Noting that there are six lawyers for every MBA in the House of Representatives and eight lawyers per MBA in the Senate, Saut says "professional arguers" are going to get bounced from office in favor of people with business experience. Right or wrong, in the business world decisions must be made. It's far easier for a company to fail than it is to take down a whole country. Lawmakers have a tradition of taking advantage of that fact by delaying decisive action as long as possible.

With the corporate world on the sidelines awaiting clarity, the economic data figures will hit a bit of an airpocket as we approach the end of the year and the dreaded deadline that comes with it. If stocks pull back on that news, Saut suggests investors treat it as a holiday gift.

Once the elections and Fiscal Cliff are in the rearview, the strategist says companies will start to spend again, resetting the economy and getting GDP growth happening again. In other words: buy the dips.

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