After racking up gains for nearly a month, US markets appeared to register more seriously the threat of the looming “fiscal cliff,” with selling taking hold in the week to Friday amid rising nervousness.
The fixed spending cuts and tax hikes that will take hold from Jan. 1 if battling politicians cannot compromise on an alternative threaten to send the US back into recession.
For weeks, investors have appeared confident that a deal on an alternative plan to cut the fiscal deficit will get done.
Buying was strong through Wednesday, as hints flew that the Republicans and Democrats would find common ground.
However, by Friday, there was no compromise in sight, and with the Christmas-New Year holiday period immediately ahead, the prospects for a deal were low and investors started to show worry.
“The lack of any progress in the fiscal cliff talks just kept people feeling somewhat nervous, and that is preventing the market from making any meaningful attempt higher,” Michael James of Wedbush Securities said. “That will remain the primary driver of trader sentiment over the next two weeks, regardless of anything that comes out, economic data points or overseas action.”
For the week, the broad-based S&P 500 was down 0.32 percent to 1,413.58. The 30-stock Dow Jones Industrial Average lost 0.27 percent to 13,135.01 and the tech-heavy NASDAQ Composite gave up 0.70 percent to 2,971.33.
Indices were generally all lower, though the year-end cliff malaise was tempered by the scores of companies moving dividend payments to just before New Year and announcing special dividends for the same timeframe to beat the expected dividend tax hike that will come with whatever deficit-fixing legislation is passed.
The NASDAQ was pulled lower than the others by Apple Inc, which remained volatile, but finished the week off 3.8 percent at US$409.76, almost US$200 below the year’s high in September of US$705.07.
Investors continued to show doubt about the long-term market darling’s ability to further impress with new products and market domination, as the global economy remains slow.
The cliff will dominate the market through the year end, unless a deal for alternative legislation is crafted over the next week, analysts said.
Hopes are high that at least a short-term compromise to avoid the worst effects would be struck, but even that did not cheer analysts.
“This would be a blow to confidence and the markets and would mean a slower growth outcome than in the baseline, but would stop short of a recession,” Deutsche Bank economists said.
Peter Cardillo of Rockwell Global Capital was cautiously optimistic.
“Maybe, if we get a surprise over regarding the fiscal cliff over the weekend, maybe we can see some agreement emerge before Christmas,” he said. “If that happens, we’ll get a very strong rally towards the end of the year.”
The week ahead will deliver fresh data on housing, manufacturing, personal incomes and consumer spending, giving a better picture of the pace of the US economy as the year winds up.
Economists are still putting US growth for the fourth quarter at a slow 1 percent pace or less and hoping that a cliff deal will lead to a rebound early next year.