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How to trade a Fiscal Cliff deal

You would have to be living in a cave to be unaware of the so-called Fiscal Cliff that the U.S. is facing. Without going into too much detail, the Fiscal Cliff is a series of economic tax hikes and spending cuts scheduled to take effect at the end of the year, which combined would send the U.S. economy back into a recession.

Most analysts agree that unless Congress and the President are able to work together to solve the problem, we are going to see a reduction in GDP of around 5%, which will result in the second recession of the last 10 years.

What makes things even scarier is that there really doesn’t seem to be much debate about the impacton the economy if no deal is reached. Everyone seems to agree on the impact, but the problem is how to avoid it. The reason there has been so much panic is the recent inability of Republicans and Democrats to work together. Party lines are tighter than ever, and in recent years the two parties have not been able to accomplish much.

Because of this, there are a lot of people that feel it is inevitable that we will go over the fiscal cliff. Understanding this, we presented four ways to play a trip over the fiscal cliff, but this article is going to take a slightly different approach.

We are going to assume that Congress will come together to reach a deal. It seems unlikely that our politicians would jeopardize pushing the country into another recession if there is any way around it, which there is. Former President Bill Clinton compared the current situation to “two dogs that meet each other over a piece of meat”. Both sides want a solution, but neither wants to look weak.

Assuming that you believe both parties will come together, we are going to look at four trades that could win when a deal is announced.

1.) Verizon (VZ)

One of the biggest changes we are facing next year is higher tax rates on capital gains and dividends. Under President Clinton, the maximum capital gains tax rate was 20%, but that was reduced to 15% during the Bush era, which are scheduled to expire at the end of the year. Because of this, high-dividend paying stocks have stalled, and a lot of companies have been announcing special one-time dividends this year to get money into the hands of their shareholders before the higher tax kicks in. This is a hot topic for Republicans, and they will do whatever they can to keep the tax cuts in place for at least another year.

If they succeed, we expect to see Verizon (VZ), with its high dividend payout come back into favor with investors. The stock has been under selling pressure since October, but we think that will turn around if we hear news of an extension to the capital gains tax cut. With the selloff we have seen since the start of October, we believe there is a good buying opportunity in the stock at its current level. There is some risk involved in setting up a long position in a stock, but we believe a long VZ position will work out well in the event we see an extension of the 15% capital gains rate.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.