Fiscal cliff: No need for investors to panic - yet

Just because President Obama and Congress haven't cut a deal to avoid tax increases and spending cuts that will threaten a new recession, is that any reason for investors to freak out and sell stocks, bonds and retirement funds?

Investment advisers, trying to preserve healthy 2012 gains in the markets after a decade of pathetic results, are pushing clients to stay calm about the mess in Washington.

While the financial markets will be nervous until there is a deal, "the underlying economic data continues to offer encouraging signs," Mark Luschini, chief investment strategist at Janney Montgomery Scott, wrote in a note to clients Wednesday.

"[Though] investors are being bombarded with suggestions to sell, Vanguard urges you to be cautious," said investment analyst Sarah Hammer, in one of a string of hand-holding video and written commentaries the fund giant has posted to try to persuade clients to hold on to their retirement accounts instead of dumping them to buy, say, gold, or high-yield, high-risk junk debt.

Obama was scheduled to return to Washington early Thursday from a Christmas vacation in Hawaii. Congress is to reconvene Thursday. If the president and the Senate and House fail to reach an agreement, hundreds of billions of dollars of tax increases and federal spending cuts could jolt the U.S. economy.

The overhang of the fiscal cliff deadline did not overwhelm the markets on Wednesday. The Dow Jones industrial average slipped just 0.2 percent.

There is a chance for an abridged deal before Jan. 1 that would allow some higher taxes for wealthier Americans and fewer budgets cuts. Or an agreement might be achieved in the first weeks or months of 2013. But many observers believe either of those developments would still unnerve the financial markets and affect the economy at a time when housing and other economic indicators give some confidence that the new year could see a fast-improving economy.

In any regard, the fiscal cliff has the attention of most Americans. So what's the worst that can happen?

Asset prices are supposed to reflect the cash they will generate for their owners. But a feared or actual drop in government spending that companies depend on, plus increases in federal tax breaks that consumers and businesses count on, "may disrupt those cash flows for a couple of quarters," said James Meyer, chief investment officer at $1 billion-asset Tower Bridge Advisors.

Such a situation could temporarily depress securities values, but they will recover, "assuming Washington doesn't go so far as to allow the U.S. to default on its debt and really create a mess," Meyer added.

"The odds of that are small," he said, but not zero. The possibility lawmakers could once again threaten to stiff the Federal Reserve and other government creditors, instead of making a deal, could push investors to sell.

A government default would likely trim stock values, especially for "tech, industrials, basic materials, money-center [large investment] banks and high-profile retailers," Meyer explained, as well as other "stock market sectors that tend to swing higher in a rising market and lower when prices fall."

"[Obama] thinks he earned a mandate in the election to do things his way," Meyer said, instead of compromising as much as he did in a similar situation last summer. But neither he nor his rivals are strong enough to force a "one-sided agreement," Meyer said.