By Jeff Cox, CNBC.com Senior Writer NEW YORK ( CNBC) - " Fiscal Cliff" is a term you'll be hearing much more often between now and the end of the year. That's when a half-trillion dollars worth of tax cuts and spending boosts go by the wayside, possibly dragging the U.S. economy into the abyss of another recession. That, however, is the worst-case scenario. A more likely outcome, according to those who have studied the issue closely, is that Washington officials come up with a way to extend many of the items in question before automatic tax increases and spending cuts kick in that could choke the life out of the already-stumbling recovery. Global policy makers have done it during the financial crisis of 2008, the U.S. budget imbroglio in 2011, and throughout the European sovereign debt disaster.
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In other words, policymakers soon will embark on another round of their favorite sport: Can-kicking problems as far down the road as possible (if you'll pardon the overused market cliche). "In 2012, the fiscal cliff carries major economic consequences...but (is) unlikely to trigger a financial crisis," Lee said. "Of course, we ultimately expect some form of 'can kicking' but even if this comes down to the final week of December before action, we expect markets to become more comfortable with the notion this is not a financial crisis a la 2011." Ah yes, 2011. That was the year the U.S. confronted the danger of defaulting on its cascading debts, a situation that ultimately led Standard & Poor's to downgrade American debt for the first time in the nation's history. "Investors are at the front-end of thinking about the fiscal cliff as well as the turmoil in Europe and thus, naturally, caution about the next two quarters is building," Lee said. "We also know that the crisis was only buyable last year when we saw the 'whites of the eyes' of resolution and thus, the logical choice is to be cautious. Lee sees investors efforts trying to front-run -- and sell into -- a bad outcome for the Washington negotiations. That, in turn, will offer a dip-buying opportunity, with specific focus on financials and cyclicals. He also expects energy to outperform as it often does following consecutive quarters of strong stock market gains. Some of JPMorgan's top choices for individual stocks: Pioneer Natural Resources ( PXD), Air Lease Corp ( AL), Denbury ( DNR), Embraier ( ERJ) and Berry Petroleum ( BRY). Other experts are a bit less sanguine about the outcome, even though the consensus belief is that the U.S. is unlikely to tumble off the cliff all at once. "If politicians continue to dither, investors should view the fiscal cliff as a major economic and political threat to growth, and one that would warrant a higher risk premium in the valuations of equities, high yield bonds and other risk assets," Pimco's Mohamed El-Erian said in an email response to a question about the fiscal cliff. Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco, thinks investors ought to gravitate to dividend-paying stocks to protect cash flow, with a focus on technology and consumer staples -- essentially "higher-growth assets or assets that do well in a more austere environment."
"Despite the problems, the United States is still one of the bright spots of the world," he said. "It's just a matter of growth slowing, and if in fact growth is slowing you need to reposition differently." James Paulsen, chief market strategist at Wells Capital Management in Minneapolis, said that whatever the Washington negotiations produce, investors should count on getting less stimulative help from the government. "We're experiencing the fiscal cliff already, it's just in infinitesimally small ways, eating away at us every day," said Paulsen, who advocates not only buying dips but also selling into strength in what he expects to be a volatile environment where the S&P 500 finishes the year at 1,500, despite all the turbulence. For Randy Frederick, director of trading and derivatives at Charles Schwab, a likely market pullback over the summer brings with it a chance to employ options strategies like covered calls and collars, both of which attempt limit downside. "When you talk about a fiscal cliff...it's probably a little early to worry about those issues," he said. "But we are due for a pullback for a number of different reasons." --Written by Jeff Cox at CNBC