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Stocks turn upward on hints of ‘fiscal cliff’ deal
Question of the Day
NEW YORK (AP) — On Monday, the stock market was as choppy as the “fiscal cliff” dealmaking that has been yanking it around.
Stocks opened little changed but jerked higher at midday as headlines began to cross that the bare bones of a deal had been worked out to avoid a drastic series of tax increases and government spending cuts set to kick in after a midnight deadline.
President Obama told news media at an early afternoon appearance that a deal on reducing the U.S. government’s budget deficit was “within sight, but not done.” He urged negotiators to get an agreement wrapped up.
The Dow Jones industrial average surged as much as 99 points in midday trading, but investors’ enthusiasm waned as it became clear a deal wasn’t completed yet. As of 2 p.m. the Dow was up 34 points at 12,973.
The Standard & Poor’s 500 was up eight to 1,411, and the Nasdaq composite index was up 29 to 2,989.
If politicians can’t agree on a deal by midnight, then higher taxes and lower government spending will automatically kick in Tuesday — the so-called fiscal cliff. That higher-tax/lower-spending combination would hurt the economy, many investors believe. But what might hurt more, they add, is the psychological impact of knowing that the government can’t agree on a budget.
“We’re having a fragile recovery, with the pain of 2008 still fresh on everybody’s mind,” said Joe Heider, principal at Rehmann Group outside Cleveland. “It’s fear of the unknown. And fear is one of the greatest drivers of the financial markets.”
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 investors are unruffled. Even if Republicans and Democrats can’t reach a deal, some investors think the effect of the higher taxes and lower government spending would be more like the anti-climactic Y2K scare than a true Armageddon. The impact 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, these investors reason.
Others are more concerned. The higher taxes and lower government spending could take more than $600 billion out of the U.S. economy and send it back into recession. Politically, the U.S. would send a message that its lawmakers can’t cooperate. And without a deal, investors would have no good read on the country’s long-term policy for taxes and spending, or how the government plans to eventually trim its deficit.
Tim Speiss, partner in charge of the personal wealth advisers practice at EisnerAmper in New York, followed the cliff negotiations on Monday and wondered if the U.S. would get its debt rating cut again. The Standard & Poor’s ratings agency cut its rating of the U.S. amid similar negotiations when lawmakers were arguing over the government’s borrowing limit in August 2011. S&P said at the time that “America’s governance and policymaking (is) becoming less stable, less effective, and less predictable.” Its rating cut sent the stock market into a tailspin.
The other major ratings agencies, Moody’s and Fitch, have suggested that they might lower their ratings of the U.S. if the country goes over the cliff.
“That is, unfortunately, the big story,” Mr. Speiss said.
It’s also one of the only stories. There’s been little other news to trade on during the holiday season, giving the fiscal cliff drama outsized influence. 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 also has been light, with many investors still on vacation. That also makes the market more susceptible to getting yanked around: With fewer shares trading hands, the market can be moved by relatively small trades.
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