Cliff fight may cancel out December stock market rally
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 Nov. 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.
A string of economic indicators this week, which includes a key reading of the manufacturing sector on Monday, culminates with the November jobs report 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.
"We have a week with a lot of economic data, and obviously most of the economic data is going to reflect the effects of Sandy, and that might be a little bit negative for the market next week, but most of that is already expected - the main focus remains the fiscal cliff," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
Concerns about the cliff sent the S&P 500 into a two-week decline after the elections, dropping as much as 5.3 percent, only to rally back nearly 4 percent as the initial tone of talks offered hope that a compromise could be reached and investors snapped up stocks that were viewed as undervalued.
On Wednesday, the S&P 500 gained more than 20 points from its intraday low after House Speaker John Boehner said he was optimistic that a budget deal to avoid big spending cuts and tax hikes could be worked out. The next day, more pessimistic comments from Boehner, an Ohio Republican, briefly wiped out the day's gains in stocks.
On Friday, the sharp divide between the Democrats and the Republicans on taxes and spending was evident in comments from President Barack Obama, who favors raising taxes on the wealthy, and Boehner, the top Republican in Congress, who said Obama's plan was the wrong approach and declared that the talks had reached a stalemate.
"It's unusual to end up with one variable in this industry, it's unusual to have a single bullet that is the causal factor effect, and you are sitting here for the next maybe two weeks or more, on that kind of condition," said Sandy Lincoln, chief market strategist at BMO Asset Management U.S. in Chicago.
"And that is what is grabbing the markets."