Michael Conway & The Street On Fiscal Cliff Concerns


Lindsey Bell: We have a fiscal cliff that is quickly approaching. We most recently heard from the IMF. They voiced their concerns. Tax hikes and spending cuts really could impact our economy. Now, Michael, what do you think GDP, the impact of GDP, could be from this fiscal cliff?

Michael Conway: Lindsey, these numbers vary. They could be anywhere from three points to as much as five points of overall GDP. Those are big numbers that will affect the economy.

Lindsey Bell: Especially considering that most economists right now are estimating a 2% rise in GDP.

Michael Conway: That’s right.

Lindsey Bell: What’s the probability that the government will answer these issues, address them before the issues expire?

Michael Conway: That’s a great question. In our political climate today, it’s really uncertain that something will happen before the election. More than likely, it will happen at the beginning of next year. That’s the way it looks right now. We think that a lot of these tax hits will expire at the end of the year and will affect the economy going into the first quarter, and they’ll have to figure it out at the beginning of the year. Next year, $109 billion will get cut from non-defense and defense spending, in addition to all the tax hikes that are going to come down the pipe as well. Tax rates will go, the lowest tax rate will go from 10% up to 15%. The highest rate will go from 35 to 39.6. But really the big issue to me is what happens to taxation on dividends. That’s going to go from 15% up to the full 39.6, and capital gains will increase from 15% up to 20%. With all of these things happening at once, that’s 3 to 5% of possible hit to GDP.

Lindsey Bell: Right. How do you position a portfolio going into the second half of the year with all these uncertainties?

Michael Conway: Well, I think what you have to do, with all of the risks that we see in Europe, with this fiscal cliff issue, with the slowdown in China, which I think is a little bit more than has been advertised, I think we need to have a risk … We need to be careful with portfolios and have a conservative approach. I like to look at hedging strategies, hedging in tactical strategies, to 20 to as much as 25% of a portfolio. We really want to have an overall fairly low-risk profile on a portfolio, given all the uncertainties that we’re talking about.