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Tuesday, January 1, 2013

Fiscal Cliff: Will Stocks explode or Get dumped ?

For investors, though the question remains open as to what that means for stock markets in the U.S. and abroad, being left in this limbo may be the worst possible outcome. If no pact is set by the open of New York trading Wednesday, traders could opt to deliver Washington a loud and clear message about what they think of the intransigence. That means punishing stocks and sending the major averages lower, perhaps significantly so. Generally speaking, any deal should be a good deal for the market since it eliminates an immediate worry.A trader wearing "2013" glasses works on the floor at the New York Stock Exchange in New York, Monday, Dec. 31, 2012. 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. Getting something done probably beats getting nothing done, for now. Of course, also generally speaking, the fiscal cliff will prove to be only one point on the continuum of uncertainty, and soon it will be replaced by something else. The top candidate for inducing angst in the markets next is whether to raise the debt ceiling, around which the upcoming debate undoubtedly will be contentious. As a reminder, the 2011 dispute over the ceiling was one of the factors in Standard & Poor's decision to downgrade the U.S. credit rating from AAA.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. On Monday, the House and Senate met in rare New Year's Eve sessions to try to take another swing at compromising. 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 by the approaching "cliff." Even on Monday, some investors were still expecting a deal to get done on time. After all, it's not unusual for high-profile budget negotiations to go down to the wire. And 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 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. government amid similar negotiations in August 2011, when lawmakers were arguing over the government's borrowing limit. S&P said at the time that the "political brinksmanship" highlighted how "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. because of the "fiscal cliff." "That is, unfortunately, the big story," 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. The most significant economic indicator scheduled for this week, the government's monthly jobs report, won't be released until Friday. The yield on the benchmark 10-year Treasury note rose to 1.76 percent from 1.70 percent late Friday, a sign that investors were moving money into stocks. — but then Congress could always retroactively repeal those higher taxes, these investors reason Unfortunately, knowing precisely what will happen once traders get back to work this week is impossible, because try as we might, we still can't predict the future. However, owing to the extensive, months-long build-up to the fiscal cliff, a few possibilities can be considered. Should you want to plan accordingly as to what suits your own gut or level of risk, for tomorrow we may see: •That selling prevails from the outset. If there's no deal from Capitol Hill and President Obama, stocks may be in for an ugly day. Even if a settlement is completed, equity markets still could open down based on the idea of selling the news. One of the many adages about Wall Street is the concept of "buy the rumor, sell the news." Stocks were up big on Monday helped by anticipation of an agreement -- the Dow Jones Industrial Average (^DJI) climbed 166 points, or 1.3%, the Nasdaq (^IXIC) rose 59 points, or 2%, and the S&P 500 (^GSPC) was up 24 points, or 1.7%, to end a fourth straight positive year on a high note. •An immediate rally in U.S. stocks that carries through the day on the thinking that even if Congress isn't there yet, it will be eventually. Other factors may also be in play, as will be addressed below. Just remember that as soon as the cliff is out of the way, the markets will be worried about something else. Again, the debt ceiling is a strong contender to fill this role. •Stocks start with an advance, but that fades and the major markets are negative by day's end. Professional traders and trading programs aren't necessarily going to let any early profits run all session. They get spooked, they get out. They don't operate the way
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