By Wallace Witkowski, MarketWatch
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.
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."
Still, that had little pronounced effect on Friday's market.
Both the Dow Jones Industrial Average (DJI) and the S&P 500
Index (SPX) rose less than 0.1%, and the Nasdaq Composite Index
(RIXF) 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. (WFM), Tellabs Inc.
(TLAB), Guess Inc. (GES), Brown-Forman Inc. (BFA), Las Vegas Sands
Inc. (LVS), and Ethan Allen Interiors Inc. (ETH) were among
companies saying they would issue a special dividend, while Walt
Disney Co. (DIS) joined Wal-Mart Stores Inc. (WMT) in scheduling an
early dividend payment for December that would have usually been
made in January.
Notably, Costco Wholesale Corp. (COST) turned heads on Wednesday
with an eye-popping $7-a-share special dividend that will be
financed with 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.
A few more earnings are expected to trickle in next week with
reports from Big Lots Inc. (BIG) and AutoZone Inc. (AZO) on
Tuesday; Brown-Forman and SAIC Inc. (SAI) on Wednesday; and H&R
Block Inc. (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.
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