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December 31, 2012

Stocks struggle for direction as ’cliff’ nears

From The Associated Press

NEW YORK — The stock market struggled for direction Monday morning after five days of losses, with the “fiscal cliff” just hours away and lawmakers yet to reach a solution.

The Dow Jones industrial average was down slightly, 24 points, to 12,914 after the first half-hour of trading. The Standard & Poor’s 500 was up two points at 1,405. The Nasdaq composite index was up five to 2,965.

Many investors are unsure of what to do with their money as long as the “fiscal cliff” remains unsolved. That refers to higher taxes and government spending cuts that will kick in Tuesday if Republicans and Democrats can’t hammer out a budget compromise by midnight Monday. Both sides had been hoping for a deal over the weekend, but negotiations were stop and go. Both the House and Senate were scheduled to meet again Monday, unusual for New Year’s Eve.

It’s difficult to discern how a deal, or lack of a deal, might affect the stock market. From mid-November through roughly mid-December, the stock market rose more or less steadily, despite the “fiscal cliff” looming on the horizon. It wasn’t until shortly before Christmas that the “cliff” finally scared investors enough to send the market down.

Some of the reason that the “fiscal cliff” has been able to yank the market around is logistical. There’s been little other news to trade on in the last couple weeks of the year, which are traditionally quiet. No major companies are scheduled to report earnings this week, and the major economic indicator this week, the government’s monthly jobs report, won’t be released until Friday.  

Trading volume has also been light, with many investors still on vacation. With fewer shares trading hands, the market can be moved by relatively small trades. Last week, about 2.2 billion shares traded hands each day on average. Throughout the year, the average has been closer to 3.6 billion.

The yield on the benchmark 10-year Treasury note rose to 1.73 percent from 1.70 percent late Friday.

In Europe, markets closed mixed after a half-day of trading. Trading was closed in Germany and Italy. U.S. and other markets will be closed Tuesday for New Year’s Day.

There are reasons to be calm as the “cliff” approaches. Even with the deadline fast approaching, many analysts still expect a deal to get done. It’s not unusual for high-profile budget negotiations to go down to the wire as both sides seize the opportunity for political theatrics.

And even if Republicans and Democrats can’t reach a deal, and the tax hikes and spending cuts go into effect Tuesday, many analysts think the effect would be more like the anti-climactic Y2K scare than a true Armageddon. The impact of the higher taxes and lower government spending would be felt only gradually — for example, workers might get more taxes withheld from their first couple of paychecks in the new year — but then Congress could always retroactively repeal those higher taxes.

But there are also reasons to worry. The higher taxes and lower government spending could send the economy into a recession. Politically, the U.S. would send a message that its lawmakers are bickering, something that’s unpalatable to many investors.  

Without a deal, that also means that investors don’t have a good read on the government’s long-term budget policy. It’s likely that lawmakers could pass a stop-gap bill to fend off the cliff. That would probably keep current taxes and government spending in place for the short term, and require lawmakers to reconvene in the new year to hammer out a more permanent deal. But that wouldn’t solve lingering disputes over how much the U.S. government should tax and spend.  

Elsewhere, there were reminders that the “fiscal cliff” is not the only problem facing the markets and the economy. German Chancellor Angela Merkel used her New Year’s speech to warn that Europe’s economic turmoil “isn’t overcome by a long stretch.”

 

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