Investors eye the 'cliff' as Obama gains in polls

By MATTHEW CRAFT

AP Business Writer / September 30, 2012

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Twists in the talks will likely rattle markets as the new year approaches. But if stocks do fall sharply, investors expect that would push Republicans and Democrats to reach a deal.

‘‘Ugly negotiations in the lame-duck session could really throw the market for a loop,’’ says Kleintop. ‘‘It could be a painful process for investors.’’

In a report out this week, analysts at Goldman Sachs tried to estimate just how painful the process will be. Goldman expects the stock market will start sinking after the elections as people realize the fiscal cliff ‘‘will not be solved in a smooth fashion.’’

That’s the reason Goldman forecasts that one broad measure of the stock market, the Standard & Poor’s 500 index, will end this year at 1,250 — a 13 percent drop from where it closed Thursday.

But all of that mayhem sounds better than the alternative: another recession caused by letting the $600 billion in tax increases and spending cuts through. It’s also why many take solace in the idea that, whatever their political party, nobody wants the economy to shrink.

Dan Greenhaus, chief global strategist at the brokerage BTIG, wonders if that’s placing too much faith in Washington. ‘‘Republicans aren’t losing the House,’’ Greenhaus said. ‘‘So as the odds of Obama winning re-election go up, what you have to ask is: How are these two parties going to find middle ground in just a few months? I have no idea.’’