Week Ahead: Political Wrangling and the Fiscal Cliff Still in Focus!
Stock Market: Volatility To Continue!
Wall Street: Manufacturing and Housing Data!
by Ian Harvey
November 26, 2012
Holiday shopping could be a bright spot for the stock market, but both could soon stall if lawmakers don't make progress on the ”fiscal cliff” when they return in the week ahead.
Congressional leaders and President Barack Obama have said they expect compromise when making a deal to stop the $500 billion wave of higher taxes and automatic spending cuts from hitting the economy early next year.
But many on Wall Street are betting Congress will resort to its fractious ways before a deal is reached, and that could upset the stock market — and holiday shoppers, particularly those at the high end.
There is a batch of consumer-related data in the week ahead, most of it housing data, with home prices on Tuesday, new-home sales Wednesday and pending home sales on Thursday.
The Past Week
At Friday's close, the Standard & Poor's 500 Index (SPX) wrapped up its second-best week of the year with a 3.6 percent gain. Encouraging economic data in the week ahead could confirm that regardless of the ups and downs that the fiscal cliff could bring, the market's fundamentals are solid.
All three major averages had their best week in over five months. For the week, the Dow rose 3.3 percent, the S&P climbed 3.6 percent and the Nasdaq Composite Index (COMP) jumped 4 percent.
Friday was a solid day for the Dow Jones Industrial Average (DJI), which ended near a session high to finish north of 13,000 for the first time since Nov. 6. In addition, the blue-chip barometer ended atop its 200-day moving average for the first time in more than two weeks.
With a lack of domestic data to go on, Wall Street spent the holiday-shortened trading day applauding upbeat reports from China and Germany. Investors also appear to be optimistic about the holiday shopping season, with most tech stocks and retailers gaining notable ground on the biggest shopping day of the year.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, fell to near 15.
Among key S&P sectors, techs and telecoms led the market advance, while utilities lagged.
Consumer discretionary stocks were up 4.4 percent for the week, one of the best performers, and the sector was the best performer since the start of November, up 2.3 percent against declines in most other sectors. Chain stores will provide a look at the holiday sales in their November sales reports, expected to be released Thursday.
European stocks had their best week so far this year, boosted on Friday by strong German business confidence data and growing expectations Greece will receive more aid.
Greece said the International Monetary Fund had relaxed its debt-cutting target for the country, suggesting lenders were closer to a deal for a vital aid tranche to be paid. But other sources involved in the talks cautioned the funding gap was far bigger than Greece has suggested, according to Reuters.
The Week Ahead
Fiscal Cliff and Its Effects in the Week Ahead
President Barack Obama and U.S. congressional leaders are expected to discuss ways to reduce the budget deficit and avoid the "fiscal cliff" of automatic tax increases and spending cuts in 2013 that could tip the economy into recession.
As politicians make their case, markets could react with wild swings in the week ahead.
There are several area that could affect you if the tax increases apply:-
• There will be much more effect on the high end -- taxes are going to go higher for the wealthy, no matter what kind of deal is reached.
• There is an automatic 3.8 percent tax, resulting from the Affordable Care Act, on investment income for those couples earning $250,000 or more, and another 0.9 percent tax on each dollar earned above that threshold. The 2 percent payroll tax holiday is expected to expire for all tax brackets.
• Everybody’s paycheck goes down 2 percent next year – which will really hit home.
What’s not clear is whether the top tax rates will be raised, as sought by Democrats, or whether other revenue sources will be found, such as reduced deductions, a path suggested by some Republicans.
The expected increase in capital gains and dividend taxes are still unknowns, but they have already hit some stocks. The dividend-paying utilities sector was the only negative major S&P sector this past week, down close to 1 percent, and it’s the worst performer since the beginning of November, down more than 8 percent.
Analysts are split on whether the market will be able to keep rallying, and they say whether there will be a “Santa Rally” this year depends on Congress.
Many in the market agree there will be some sort of agreement that will fuel a rally, but the road there will be full of political landmines as Democrats and Republicans dig in on positions defended during the recent election.
Liberals want tax increases on the wealthiest Americans while protecting progressive advances in healthcare, while conservatives make a case for deep cuts in programs for the poor and a widening of the tax base to raise revenues without lifting tax rates.
The VIX and the “Fiscal Cliff”
The CBOE Volatility Index .VIX, known as the VIX, Wall Street's favorite barometer of market anxiety that usually moves in an inverse relationship with the S&P 500, is in a long-term decline with its 200-day moving average at its lowest in five years. The VIX could spike if dealings in Washington begin to stall.
If the fiscal cliff happens, a lot of major assets will be down on a short-term basis because of the fear factor and the chaos factor. Therefore, go long the VIX and short the market.
Overseas Influences in the Week Ahead
Thursday is a full calendar of international economic reports. Japan will release its unemployment rate and industrial production. Recent Japanese data has been poor, but Japan's stock market has rallied as its yen has shown weakness. Likewise, Germany will release its unemployment rate on Thursday, with expectations for 6.9 percent.
The Middle East And Europe
Tension in the Middle East and unresolved talks in Europe over aid for Greece could add to the uncertainty and volatility on Wall Street could surge, analysts say.
An Egypt-brokered ceasefire between Israel and Hamas came into force late on Wednesday after a week of conflict, but it was broken with the shooting of a Palestinian man by Israeli soldiers, according to Palestine's foreign minister.
Buoyed by accolades from around the world for mediating the truce, Egyptian President Mohamed Mursi assumed sweeping powers, angering his opponents and prompting violent clashes in central Cairo and other cities on Friday.
This kind of potential large-scale conflict can certainly overwhelm some of the fundamental data and affect the US stock market contributing to higher volatility.
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