As debates and negotiations around the pending ‘fiscal cliff’ continue, we at BNY Mellon Wealth Management are watching closely and assessing how potential changes might impact our clients’ strategies and portfolios. To share the latest news and our thoughts on its implications, we've created this ‘Cliff Notes’ bulletin. We hope this resource—which we’ll continue to update over the coming weeks—will be helpful to all during this uncertain time.

Latest Update:  January 7, 2013
After exhaustive negotiations over the last week of 2012, the Senate and the House approved, and the President signed, The American Taxpayer Relief Act of 2012, addressing the tax portion of the so-called fiscal cliff crisis.

While the legislation is primarily a tax bill, it temporarily delays for two months the so-called sequester, a series of automatic spending cuts to the budgets of the Pentagon and various domestic agencies that would have gone into effect on January 1, 2013. The legislation also does not address the $16.4 trillion debt ceiling that the government reached New Year's Eve.

The legislation will raise approximately $600 billion in new revenue over 10 years when compared to the tax provisions that were due to expire on December 31, 2012¹.

From an investment perspective, by making tax rates permanent, lawmakers have created a more stable environment, allowing for easier business planning and investment planning. With the debate on

spending reductions and the debt ceiling postponed, however, investors should anticipate another showdown in Washington over the next two months.

Overall, these tax changes should have only a slightly negative impact on growth in the U.S. in 2013. In particular, the reduction in take-home pay as a result of the payroll tax may impact consumer spending and result in an initial softness in retail sales during the first half of the year. Nevertheless, we expect growth to rebound in the second half, forecasting a 2.2% annual growth rate for 2013 and about 3.0% in 2014. We expect interest rates to remain range bound—between 1.25% and 2.75% on the 10-year Treasury—and inflation to remain tame.

Given the unresolved fiscal issues, we expect more market volatility near term. However, just as equity markets did throughout 2012, we expect the market to grind higher once uncertainty is removed. We continue to favor equities over bonds and, in particular, we prefer large cap stocks. We also continue to favor dividend-paying companies that can grow dividends over time. While dividend and capital gains tax rates will increase for high income taxpayers, we believe these levels are low enough that investment behavior shifts should be minimal. Lastly, additional volatility likely will create potential buying opportunities for those investors who have longer-term horizons and are willing to act.