Investors expect huge drop in stocks if ‘cliff’ deal isn’t reached

Over 60 percent of investment experts expect the stock market would drop by at least 10 percent if Washington fails to strike a deal avoiding the “fiscal cliff,” according to a new poll.

While most of those surveyed on Wall Street expected that Congress and the White House will come together to strike a deal, a vast majority predict dire consequences if the standoff fails to produce an accord averting those automatic spending cuts and expiring tax breaks.

In a poll of 62 hedge fund, pension fund and money market managers, 48 percent said the Dow Jones Industrial Average would drop 10 percent if the U.S. were to go over the cliff, while another 11 percent expected the drop would be 20 percent. Two percent of those surveyed believed the blue chip index would suffer losses above that amount if the policies making up the fiscal cliff were to take effect. Roughly one-fifth of those surveyed believe the Dow would not be affected at all.

The poll, conducted by Potomac Research Group, found that a slim majority of financial professionals do believe a deal will get done compared to those who anticipate failure — 56 percent to 44.

{mosads}Of the expiring tax provisions that are part of the cliff, nearly half of those surveyed were most concerned about the potential for the rate on dividends to jump from 15 percent to the same level as income tax rates, which could be as high as 39.6 percent. 

Some companies have rushed to issue dividends before the end of the year to ensure that their investors pay the 15 percent tax rate.

Another 24 percent in the poll said they were most worried about a looming increase to the capital gains rate. Only 2 percent said their biggest concern was the potential increase to the top individual tax rate, which is a top priority of President Obama’s.

Despite the concern over the cliff, market participants were generally bullish on the direction of the markets, as 59 percent of those surveyed are optimistic about the future of equity markets, compared to 29 percent who held a gloomy view.