Fiscal cliff games to remain in focus
Political posturing, press conferences to rule the market
SAN FRANCISCO (MarketWatch) — Political posturing by players involved in fiscal cliff negotiations will be the primary market lever in the coming week, according to strategists.
Investors got their first taste this past week on how press events from the Obama administration and members of Congress over negotiations shifted markets. Expect those markets to get even more sensitive to the political drama in the coming week as the Dec. 31 deadline approaches.
“It’s only inevitable that anxiety will build over the next few weeks,” said Andrew Slimmon, managing director of global investment solutions at Morgan Stanley Wealth Management. http://www.marketwatch.com/story/fiscal-cliff...atest_news
On Friday, House Speaker John Boehner said negotiations were at a stalemate after a week and called a White House opening bid, which included a $1.6 trillion tax hike, “not serious.” That echoed sentiment expressed by Senate Minority Leader Mitch McConnell, who called a similar plan presented by Treasury Secretary Tim Geithner “laughable.” Read more about Friday’s politcal posturing.
Still, that had little pronounced effect on Friday’s market. Both the Dow Jones Industrial Average (DJI
JIA) and the S&P 500 Index (SNC:SPX) rose less than 0.1%, and the Nasdaq Composite Index (NASDAQ:COMP) fell less than 0.1%.
Slimmon said the stock market didn’t take the opening salvos of the negotiations seriously on Friday, but if the tone is unchanged a week or two weeks from now, the selloff in markets will be much more extreme.
Stocks had sold off Monday as Congress reconvened, and again on Tuesday on concern that talks had stalled. Stock markets finished higher on Wednesday after Obama and Boehner expressed optimism that a deal could be struck, and even finished higher Thursday after getting dented by Boehner comments that “no substantive progress” had been made.
The Dow industrials rose 0.1% for the week and declined 0.5% for the month, while the S&P 500 Index rose 0.5% for the week and 0.3% for the month. The Nasdaq gained 1.5% for the week and 1.1% for November.
Pessimism is already priced into stocks, so position yourself for whether you think the fiscal cliff will get solved or not and don’t pay attention to the political rhetoric, said Doug Sandler, chief equity officer at Riverfront Investment Group.
“The writing on the wall is that there will be some sort of compromise,” Sandler said.
And if not, and negotiations fall apart, and some $600 billion in automatic tax hikes and spending cuts kick in on Jan. 1, the market will force a decision from policy makers at some point, Sandler said.
“You’d quickly have a crisis panic situation affecting the market, and that’s the only thing that moves politicians,” said Scott Wren, senior equity strategist at Wells Fargo Advisors. Under those circumstances, Wren wouldn’t expect a stock market drop of more than 10% as politicians scrambled to slap a Band-Aid on the situation.
Morgan Stanley’s Slimmon sees the negotiations through the lens of the summer of 2011, when debt-ceiling squabbles forced a 16% pullback in stocks. While a 5% pullback is possible in December over further squabbles, he doesn’t see much more than that because too many investors got burned by selling into the political infighting back in 2011.
Wren expects some sort of compromise mix of tax hikes and spending cuts using the Simpson-Bowles commission plan as a template but not before the end of the year. As for the coming week, he anticipates the market will react to the politicians stepping up to the microphone, and a very quiet volume week if nothing happens.
That focus on politicians will likely bleed attention way from a host of economic data in the coming week.
“If it’s a heavy-duty employment figure, a big surprise, I think the market could get a big move, but other numbers, I don’t think people are going to be paying much attention,” Wren said.
The Institute for Supply Management releases November manufacturing data on Monday, and services data on Wednesday. Also, on Monday, auto makers release November sales data.
On Wednesday, ADP releases November employment data. That’s followed by weekly jobless claims on Thursday, with November jobs data and the unemployment rate coming on Friday. University of Michigan also releases its December consumer confidence report on Friday.
Expect more special dividends ahead of the cliff
Investors will also be on the lookout for more special dividend announcements in the coming week, Riverfront’s Sandler said. November has seen a spike in companies announcing special dividends to head off a possible threefold hike to the dividend tax rate in the new year.
More than 210 companies have declared a special dividend in November, a threefold increase from last November, according to data from S&P Dow Jones Indices.
This past week, Whole Foods Markets Inc. (NASDAQ:WFM) , Tellabs Inc. (NASDAQ:TLAB) , Guess Inc. (NYSE:GES) , Brown-Forman Inc. (NYSE:BF.A) , Las Vegas Sands Inc. (NYSE:LVS) , and Ethan Allen Interiors Inc. (NYSE:ETH) were among companies saying they would issue a special dividend, while Walt Disney Co. (NYSE IS) joined Wal-Mart Stores Inc. (NYSE:WMT) in scheduling an early dividend payment for December that would have usually been made in January. Read more on Disney’s dividend.
Notably, Costco Wholesale Corp. (NASDAQ:COST) turned heads on Wednesday with an eye-popping $7-a-share special dividend that will be financed with debt. Read more on the rise of corporate debt.
With many of those dividend issuers coming from consumer-driven companies, Deutsche Bank expects more special dividends to come out of the retail space. Read more on 5 retailers ripe for special dividends.
A few more earnings are expected to trickle in next week with reports from Big Lots Inc. (NYSE:BIG) and AutoZone Inc. (NYSE:AZO) on Tuesday; Brown-Forman and SAIC Inc. (NYSE:SAI) on Wednesday; and H&R Block Inc. (NYSE:HRB) on Thursday.
With fewer than 10 S&P 500 companies yet to report earnings for the third quarter it’s still unclear whether the quarter was a true winner or loser year-over-year given the past 11 quarters of earnings growth.
Blended earnings for the third quarter contracted 0.9% based on the results of 490 companies, according to FactSet, while Thomson Reuters I/B/E/S, using data from 492 companies, expects the third quarter to post a 0.1% rise in year-over-year earnings.
