Podcast Center
Video Center
Webcasts
Resource Center
Events
September 19, 2012 at 11:02 AM
In his weekly market commentary on Monday, Jeff Kleintop, Chief Market Strategist for LPL Financial, cobbled together an insightful selection of the odds of a “fiscal cliff” deal during the lame-duck session of Congress based on which party wins what after the election. The stakes are startlingly high if a deal isn’t reached by midnight on Dec. 31, as spending cuts equivalent to 3.5% of GDP and tax increases of $500 billion will begin to ravage the economy on New Year’s Day.
Kleintop said that the Fed’s QE program announced last Thursday may help ease some of pinch felt by the economy, “but if we go over the fiscal cliff it is like getting a flu shot before storming the beach at Normandy.”
He lays out six post-election scenarios and the odds of the Congress and a lame-duck president, or not, reaching a deal:
1. Status Quo (Obama wins, Dems hold Senate, GOP holds House)
Odds of Outcome: High
Odds of Deal in Lame-Duck Session: Above 50%
Polls, including our “Wall Street” Election Poll, increasingly point to this as a high-probability outcome of the elections. Although there would be no change in control, holding the White House and the Senate during adverse economic conditions could be considered a victory for the Democrats, and to top it off, the GOP’s majority in the House likely shrinks.
A deal to mitigate the fiscal cliff would probably be reached in the lame-duck session under this scenario, but it would likely be closer to the Democrats’ terms given their election victory and primarily consist of higher tax rates.
2. Congress Unlocked (Obama wins, GOP holds House, takes Senate)
Odds of Outcome: High
Odds of Deal in Lame-Duck Session: Above 50%
Although the battle for the Senate is looking closer than before, this is the scenario we believed was most likely all year. Congress goes from being gridlocked to unlocked as the GOP takes the Senate, but by a very slim margin, and retains control of the House. Obama wins a narrow victory in the White House, but Republicans pick up the Senate and hold the House. A deal in the lame-duck session is likely in this scenario where the Bush tax cuts get extended.
3. GOP Sweep (Romney wins, GOP takes Senate, holds House)
Odds of Outcome: Moderate
Odds of Deal in Lame-Duck Session: Near Zero
A big win for Republicans. Under this scenario, Republicans will be unlikely to compromise with Senate Democrats on only extending some of the Bush tax cuts in a lame duck session. In addition, it is unlikely that President Obama would sign an extension of the Bush tax cuts as his last official act. With no deal in the lame-duck session, the Bush tax cuts would expire at the end of the year. Republicans would try to renew them after President Romney takes office on Jan. 20, but they will need 60 votes in the Senate to do it quickly, requiring the support of more than a handful of Democrats.
As a result, Republicans may not be able to pass an extension of the Bush tax cuts for several months until they first pass a budget resolution that would allow them to pass a tax bill through reconciliation, requiring only 51 votes in the Senate.
