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Investors likely to conquer fiscal cliff fears

U.S. President Barack Obama acknowledges House Speaker John Boehner on Friday ahead of talks on resolving the fiscal impasse.

Carolyn Kaster/AP

Worrying about the fiscal cliff has become almost as damaging to the U.S. economy as going over the cliff, given the uncertainty it is creating. But is it time to lighten up a little?

There is plenty of evidence to suggest that U.S. companies are turning cautious ahead of the cliff, as they contemplate the damage that could result if legislators can't agree on a deal to avoid big tax increases and spending cuts.

However, BCA Research of Montreal suggests that the cautious attitude may soon reverse itself.

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BCA points to the Philadelphia Fed survey of capital investment intentions, which has been sliding dramatically in recent months and approaching its lowest level since the financial crisis.

That means actual business investment will probably weaken over the next six months, as those intentions become reality. But, given the historical ups and downs of the survey, it also means that there is likely a rebound ahead.

"There is historical precedent for a sharp snap back in sentiment, should the fiscal cliff get resolved in a mild manner (our base case is for a drag of 1.5 per cent of GDP)," BCA said on its blog.

The stock market is also seeing reason for hope. After sliding in the early part of last week, the S&P 500 suddenly shifted direction and staged a tentative rebound on Friday, followed by a strong rally Monday.

The gains come despite a Wall Street Journal article that examined how widespread fear of the cliff is putting a clamp on corporate wallets. According to the paper, half of the 40 biggest publicly traded corporate spenders have already announced that they are cutting back on capital expenditures.

In particular, business spending on equipment and software didn't budge in the third quarter, marking the first standstill since early 2009. And investment in new buildings has declined.

This tightfistedness seems to have more to do with uncertainty about the future than concern about the current economic climate. But Monday's rally on Wall Street suggests that investors are feeling more upbeat about the prospects for a political agreement that would avert the fiscal cliff.

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Even without pictures of handshakes among Republicans and Democrats, the glut of uncertainty might be nearing an end.

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