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

Wall Street Angry After 'Fiscal Cliff' Plan B Fail ?

Friday could be a tense day for markets, as a resolution to the "fiscal cliff" appears less likely in the final trading days of the year.

Stock futures fell sharply Thursday evening after House Speaker John Boehner said he failed to mount support for his "Plan B" version of a bill that would raise taxes only on families earning more than $1 million, a plan already opposed by the White House. GOP leaders said the House would not take up any other votes until after Christmas, meaning the fiscal cliff talks could now count down to the new year's deadline or later.

Dow futures saw triple digit losses Thursday evening, while Asian markets gave up early gains."The odds of the U.S. slipping over the fiscal cliff have clearly risen. In a moment of bad political misjudgement, John Boehner tried to take a deal through Congress that clearly failed to have the President's support, only for it to be rejected by hawks in his own party," Rebecca O'Keeffe, head of investment at Interactive Investor said in a morning note.

"The market still expects agreement to be reached, but as we head towards the final week of the year, many investors will be reluctant to hang up their stockings and take a break as the issue goes down to the wire."

Barry Knapp, head of U.S. equity portfolio strategy at Barclays


"Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff. The House has already passed legislation to stop all of the January 1 tax rate increases and replace the sequester with responsible spending cuts that will begin to address our nation's crippling debt," said Boehner in a statement. "The Senate must now act."

The cliff is the more than $500 billion in taxes and spending cuts that would start hitting the economy Jan. 1 if Congress does not act. Many market participants have been expecting a compromise between House Republicans and the White House that would be enough to head off the worst affects and lead to bigger tax and budget discussions in the new year.

(Read More: Fiscal Cliff' Impasse: Can a Deal Still Get Done?)

Stocks so far have been tilting toward a positive resolution of the "fiscal cliff," but anxiety is rising that the talks between Congress and the White House could fail.

"The market is sensing a deal will come," said Richard Bernstein, CEO of Richard Bernstein Capital Management earlier Thursday. "...if it doesn't come period, then we're in trouble. There's a chance we go into next week and then volumes will be down and moves will be exacerbated."

The Dow Jones Industrial Average Thursday finished up 59 at 13,311, and the S&P 500 was up 7 at 1443, after a down day Wednesday. But the bond market reacted to the lack of a deal, with yields declining slightly. The 10-year yield was at 1.798 percent.

In another move aimed at pressuring President Barack Obama, the House did approve a bill Thursday evening that would cut domestic spending but protect defense spending. Defense spending is scheduled to take a major hit unless automatic spending cuts are stopped. The cuts were agreed as part of the debt ceiling compromise and are referred to as part of the sequester.

"I am tremendously offended that everyone is getting on TV," said Bernstein. "They should be is a room with their sleeves rolled up, working hard...We should sequester them until they deal with the sequester."

(Read More: Pros Make Their Picks as 'Fiscal Cliff' Deal Nears)

Markets will be hyper-focused on the cliff talks and related rhetoric Friday, as traders position ahead of the weekend and ahead of the upcoming quiet holiday week. There is personal income and spending data and durable goods at 8:30 a.m., and consumer sentiment at 9:55 a.m.

"There was so much cynicism and skepticism coming into this, and the market is up two percent for the month of December. It's behaving very well," said Leo Grohowski, CIO of BNY Mellon Wealth Management, earlier Thursday. "There's an asymmetric risk/reward here over the next 11 days. I think there's now developing more potential downside if a deal doesn't get done than there is upside to a deal getting done."

Grohowski said if there's no deal, the market could quickly lose several percent on that news alone. Analysts fear the economy would slip quickly into recession if there is no deal, and that would also slam stocks in the new year.

Even if there is a deal, Grohowski expects a choppy market in the first quarter but he sees the economy and earnings improving as the year goes on, giving a lift to stocks.

"The most annoying thing about this is the 30-year average GDP growth rate is 2.9 percent, and we're at 3.1," said Bernstein.U.S. stock index futures pointed to a sharply lower open on Friday, brushing off better than expected economic data and instead focusing on the collapse of the Republicans' "Plan B" vote in the House of Representatives, aimed at offering a solution to the U.S. "fiscal cliff".

At 8:30 a.m., Dow futures were down 187 points, while S&P 500 futures were down 22 points. Both implied a greater than 1 percent decline at the open. The NYSE will observe a moment of silence to honor the Newtown, Conn. shooting victims at 9:30 a.m.

With time running short to find a solution before Christmas, the White House said it would work with Congress to avoid the series of tax increases and spending cuts set to kick in at the start of next year. President Barack Obama said he was hopeful a deal can be reached quickly.

House Speaker John Boehner has scheduled a 10 a.m. news conference to talk about the next step
"I can't believe it. The economy is just starting to show signs of life, and they could kill it."

Third quarter GDP, reported Thursday, was revised to show 3.1 percent growth, up from an earlier 2.7 percent. The Philadelphia Fed business index Thursday was also better than expected, rising to 8.1 from November's minus 10.7 and better than an expected decline of 2.1. November existing home sales rose 5.9 percent, more than expected and the fastest pace in three years.

Investors have been acting ahead of expected cliff-related changes coming next year, including higher taxes on dividends. Dividend-paying stocks have paid the price. For instance, the utilities sector is the only major S&P sector to be negative for the year, with a loss of 1.3 percent.

Municipal bonds have also come under selling pressure recently. Lipper Thursday reported that municipal bond funds in the past week had their first outflow in eight weeks, losing $2.3 billion, the largest redemptions since Jan. 1, 2011, and the fifth largest on record

Today 2pm ET: Obama to answer questions about the Fiscal Cliff: Tweet Qs to @WhiteHouse with #My2k on twitter hashtag

Today 2pm ET: Obama to answer questions about the Fiscal Cliff: Tweet Qs to @WhiteHouse with #My2k hashtag Obama Is Taking Himself and #My2K to Twitter This Afternoon

fiscal cliff fight can KO December rally ?

On Friday, President Barack Obama accused a "handful of Republicans" in the U.S. House of Representatives of holding up legislation to extend tax cuts for middle-class Americans in order to try to preserve them for the wealthy. Speaking shortly after the president, House Speaker John Boehner, an Ohio Republican, said: "There is a stalemate; let's not kid ourselves." December is historically a strong month for markets. The S&P 500 has risen 16 times in the past 20 years during the month. But the market hasn't been operating under normal circumstances since November 7 when a day after the U.S. election, investors' focus shifted squarely to the looming "fiscal cliff." Investors are increasingly nervous about the ability of lawmakers to undo the $600 billion in tax increases and spending cuts that are set to begin in January; those changes, if they go into effect, could send the U.S. economy into a recession. "Given the 'on again, off again' fiscal cliff (negotiations), it's rather surprising how resilient this market has been," said David Rolfe, chief investment officer at St. Louis-based Wedgewood Partners. "Between now and the end of the year, there's going to be an information vacuum outside the fiscal cliff, and I believe that resiliency will be tested." In contrast to the apparent calm in equities, the CBOE Volatility Index (.VIX), a gauge of market anxiety, jumped 5.4 percent, its largest daily gain in two weeks. The VIX also rose for the week, but posted a whopping 14.7 percent decline for November. A string of economic indicators next week, which includes a key reading of the manufacturing sector on Monday, culminates with the November jobs report on Friday. But the impact of those economic reports could be muted. Distortions in the data caused by Superstorm Sandy are discounted. The spotlight will be more firmly on signs from Washington that politicians can settle their differences on how to avoid the fiscal cliff.