As 2012 comes to a close, investors find themselves facing uncertainty when stability and clarity are desired.  All eyes remain on Washington and whether a deal can be reached to prevent the economy from plunging over the “fiscal cliff”.

The Big Picture 

This problem is one of our own making and one that can be solved if political posturing can be put aside.  The issues remain ones of spending and revenue – what programs to cut and where to raise revenue.  If no agreement is reached, taxes on everyone will rise as of January 1, 2013.  Drastic spending cuts will impact domestic programs and defense spending.  The deficit will fall but at a severe economic cost.  CEOs and constituents have hounded members of Congress to do something, do anything.  As of this writing, no deal has been struck.  However, all parties involved remain optimistic. 

A year that had been plagued by uncertainty saw major stock market indices rally nevertheless.  As of last Friday, the Dow Industrial Average was nearly 6% better on the year; the S&P 500 ahead by 11.5%; the NASDAQ up more than 13% year-to-date.  Much of the strength was due to the perceived pick-up in the economy.  Housing and manufacturing sectors are showing signs of life, as is the labor market.  But all that could come to a screeching halt if Washington fails to craft an agreement. 

The domestic impact would be quick with workers seeing smaller paychecks, the unemployed losing unemployment benefits and an economic recession as a result of the one-two punch of tax hikes and spending cuts.  That means more layoffs and heightened global financial turmoil as the United States loses its standing as a global financial leader as well as the confidence of global investors. 

I, Investor 

Because the stakes are so high and time is running out, the machinations of Washington will overshadow the last day of trading for 2012, which could turn out to be a busy session as investors attempt to position themselves for the possibility of higher taxes.  There are no economic data scheduled for release. 

As usual, there will be no trading on Tuesday, New Year’s Day.  Wednesday sees November construction spending figures, Thursday we get weekly jobless claims data and December vehicle sales.  Friday’s release of December unemployment data may be moot if no agreement is near in Washington.  The economy is expected to have produced 153-thousand jobs with the unemployment rate unchanged at 7.7%. 

The following week is also rather quiet, data-wise.  Tuesday, November 8th sees November consumer credit.  Thursday has the weekly unemployment claims series, along with November business sales and inventories data.  Friday, November 11th sees the release of the November trade deficit, export/import price index and the December treasury budget. 

But without a deal out of Washington concerning long term budget solutions, addressing spending and revenues, U.S markets and investors will remain on edge.  

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