Last week, all the major market indexes eked out positive gains, despite the late-week reversal as "fiscal cliff" discussions took a turn for the worse. As the market closed out the trading week, Congress and President Obama left Washington for the Christmas holiday. As expected, the lack of key economic data this week and few corporate earnings reports put the emphasis on the fiscal cliff.
With Mr. Obama not returning from his Christmas respite until Thursday, the growing consensus is that the U.S. economy may indeed go over the fiscal cliff at least for a brief period. Adding fuel to the fire, Treasury Secretary Timothy F. Geithner said in a letter to congressional leaders that the government will hit its statutory debt ceiling Monday, though he added that he would take "extraordinary measures as authorized by law" to avert default.
Talk about going from bad to worse.
We also learned just how weak holiday sales actually were. A little more than a week ago, ShopperTrak, which analyzes customer traffic at U.S. stores, cut its holiday sales forecast to an increase of 2.5 percent over last year, down from its 3.3 percent projection issued in September and the 3.7 percent growth recorded last year. By comparison, MasterCard Advisors SpendingPulse, which tracks holiday spending, said that sales in the two months before Christmas increased only 0.7 percent compared with last year. Meanwhile, Liquidity Services noted that holiday shopping returns would climb 37 percent year over year.
What weighed on the holiday shopper this year? Matthew Shay, president of the National Retail Federation, said it was Superstorm Sandy and the ongoing debate about the "fiscal cliff" of tax increases and spending cuts that could go into effect in the new year.
That's in spite of the 16.4 percent fall in gas prices since September, according to Energy Information Administration data. Despite that drop and favorable declines in other commodities such as coffee, we are not out of the inflation woods. The latest reading on food prices from the United Nations Food and Agriculture Organization shows a 12 percent year-over-year increase in the cereals component to 255.6 for November. While down modestly month over month, the year-over-year increase reflects sharp price increases in wheat, corn and rice during the past 12 months. Tight supplies in those commodities after the summer drought are the culprit. As we started to see with the November producer price index data, the ripple effect is starting to be felt.
To me, this says the cash-strapped consumer remains in our midst. With consumer spending accounting for close to two-thirds of the domestic economy on a direct and indirect basis, many money managers will be decoding the above data in order to position themselves for coming months. While the last few days of the year could have some wide swings, given the low trading volume associated with diminished staffing levels at trading firms as well as at mutual funds, hedge funds and other institutional investor groups, it's also a time to be vigilant and forward-looking.
Vigilance is needed during these slow, low-volume trading days because the end of the year is a good time for companies to distribute, if not slip by, some unwanted news. Given the time of year, it tends to be missed revenue or earnings expectations, but it also could be charges and write-offs, among other things. Being forward-looking is also needed because if we do go over the fiscal cliff, the likelihood that the stock market pulls back is high. That would be painful in the short term, but it could present opportunities for long-term investors to pick up quality companies with solid balance sheets and good long-term prospects at more affordable prices.
That may not be a late Christmas present to yourself, but it could set the stage for favorable returns this time next year.
• Chris Versace is the editor of the PowerTrend Profits newsletter and ETF PowerTrader, as well as the host of PowerTalk. Visit them at ChrisVersace.com or follow him on Twitter at @ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.