Stocks struggle for direction as ‘cliff’ nears

December 31, 2012

NEW YORK (AP) — With the “fiscal cliff” just hours away and politicians yet to reach a solution, the stock market struggled to decide which way to go.

The Dow Jones industrial average hopped between small gains and losses in morning trading. The Standard & Poor’s 500 index and the Nasdaq composite dipped into the red but spent most of the morning holding onto small gains.

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 — 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 “fiscal cliff.”

“That is, unfortunately, the big story,” Speiss said.

There’s also been little other news to trade on during the holiday season. 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 has also 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.

Last week, about 2.2 billion shares traded hands each day on average. Throughout the year, the average has been closer to 3.6 billion.

By midday, the Dow was down four points to 12,934. The S&P 500 was up four points to 1,407. The Nasdaq composite index was up 20 to 2,981.

The yield on the benchmark 10-year Treasury note rose to 1.73 percent from 1.70 percent late Friday.

The Dow Jones industrial average is set to close about 6 percent higher for the year, slightly better than last year’s gain of 5.5 percent. That’s less than the 11 percent gain of 2010 and the 19 percent gain of 2009, though those big increases were possible largely because the Dow plunged 34 percent in 2008.

Some of the best-performing stocks for the year were those that had been hammered in 2011. Homebuilder PulteGroup, appliance maker Whirlpool and Bank of America all more than doubled over the year, after falling by double-digit percentages in 2011.

Some of the worst performers of the year were Best Buy, Hewlett-Packard and J.C. Penney. All are struggling to keep up with competitors who have adapted more quickly to changing technologies and changing customer tastes. They were all up Monday, but were each down at least 45 percent for the year.

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