Fiscal-Cliff Drama To Dominate Christmas Week

Investors will be looking for any effort next week to salvage negotiations to avert billions in automatic tax hikes and spending cuts due to begin in the new year, unless a deal is reached.

Trading is expected to be thin, with many market participants out for the Christmas holiday on Tuesday. U.S. markets close early Monday at 1 p.m. Eastern for Christmas Eve and resume trading on Wednesday.

How politicians move forward with negotiations to avoid the so-called fiscal cliff will be front and center, now that an effort by House Republicans to vote on a compromise tax bill dubbed “Plan B” fell apart Thursday night.

With GOP leaders unable to garner enough support for the bill, House Speaker John Boehner on Friday insisted he is not walking away from negotiations. Read more on Plan B collapse, Boehner’s comments.

Late on Friday, President Barack Obama said he is still ready and willing to get a comprehensive package done within the next 10 days, and challenged lawmakers to agree on “what we can agree upon” before the end of the year. Read more on Obama’s late Friday statement.

Expect Congress to come back from Christmas vacation for real negotiations, according to Bill Stone, chief investment strategist at PNC Wealth Management. “They’ll be getting down to the brass tacks on negotiations,” he said. “That will dominate the news flow.”

Rising fear that politicians will not come to an agreement before Dec. 31 rippled through the market Friday and stocks declined, cutting into gains for the week.

The Dow Jones Industrial Average  fell 0.9% for the day, and rose 0.4% for the week. The S&P 500 Index  also declined 0.9% for the day, and gained 1.2% for the week. The Nasdaq Composite Index  dropped 1% for the day, and gained 1.7% for the week. Read more on Friday’s action in the stock market.

After more than three weeks of posturing, minor shifts in positioning and not much in the way of results, Boehner recently accused congressional Democrats and Obama of doing nothing, while Sen. Harry Reid has said the GOP had wasted another week.

Boehner’s push for a vote on Plan B Thursday night was perhaps a gambit to show the president that he had enough votes “to hang tough,” said Robert Pavlik, chief market strategist at Banyan Partners.

Even before Boehner scrubbed the vote on the measure Thursday night, Senate Democrats had indicated they would let the bill die and the president had threatened to veto it.

Pavlik added the market hasn’t sold off yet, and he doesn’t expect a selloff for the rest of 2012. Even with Friday’s slump, the S&P 500 is still up nearly 14% on the year.

That’s likely to change if the United States goes over the fiscal cliff. Expect another U.S. credit rating downgrade if that happens, the strategist said.

Given the political situation, economic data have the potential to push the thinly traded market around in the coming week, according to Pavlik.

On Wednesday, the Case-Shiller home-price index for October is due. Then on Thursday, December’s consumer-confidence data come out along with weekly jobless claims and November new-home sales.

On Friday, Chicago PMI gets released along with numbers on November’s pending home sales.

Still, economic data may get overshadowed by events in Washington. Some strategists are optimistic about an agreement; others are not.

A real deal on the budget is not likely in the coming week, or even before the end of the year, according to Phil Orlando, chief equity-market strategist at Federated Investors, who agreed that Plan B was “the way to go.”

“I think ‘rich’ is $1 million a year, not $250,000,” he said. “There’s something to this. Things are moving in the right direction, maybe they’ll settle on $500,000.”

Orlando was calling for $1 million, or at the very least $500,000, as the cutoff income level for a household being rich back in November

Boehner has a point in that spending cuts put forth by Obama and Democrats are limited to savings from drawing down on two wars and interest savings on the debt, he elaborated, with no trajectory on how we reduce expenses for Medicaid and Medicare. Boehner’s negotiating position, however, has been weakened by his failure to rally members of his party to pass measures like Plan B, sparking questions as to whether he will be able to hold onto his position of House speaker in the new year. Read more on Boehner’s grip on power as speaker of the House.

What will likely happen is some stopgap measure that draws the negotiations out to the next default deadline, the debt ceiling, which is expected to be reached by late February or early March, Orlando commented.

With regard to corporate earnings, no significant reports are scheduled for the holiday-shortened week.

Marketwatch