US stocks managed gains for a second straight week, as investors clung to a blind faith that politicians would resolve the looming “fiscal cliff” crunch.
The pending threat of higher capital gains and dividend taxes next year, whatever the resolution of the negotiations between Democrats and Republicans, failed to dim sentiment. Indeed, some stocks, like Costco and Walmart, advanced because of it, as firms announced special dividends and moved forward regular payouts to before Dec. 31, to avoid an expected increase in the tax rate.
The broad-based Standard & Poor’s 500 rose 0.5 percent for the week to end at 1,416.18. The Dow Jones Industrial Average of 30 blue chips gained 0.12 percent to 13,025.58, while the NASDAQ Composite added 1.46 percent, ending the week at 3,010.24.
Although the business and financial communities continued to warn the US Congress and the White House to reach a deal for averting the economy-crunching spending cuts and tax hikes of the so-called fiscal cliff, investors did not appear too worried.
Gains during the week were broad-based, with the crucial retail sector adding 2 percent on the back of solid sales at the beginning of the holiday shopping season.
However, weak consumer spending in the third quarter and the October to early November period — when the devastation from superstorm Sandy distorted the picture — made forecasting a challenge.
“Between Sandy and the fiscal cliff, the pace of consumer spending and business investment is really unclear,” Joel Naroff of Joel Naroff Economics said.
“The implication is that the October and even November numbers have to be evaluated carefully and may not reflect the true nature of either the consumer or the economy,” he said.
“Given the noise from Washington and the fears of tax changes to come, movements in the equity markets during December may also bear no relation to underlying economic trends,” he added.
Chris Low of FTN Financial said the markets were trading the headlines from Washington on nearly a minute-to-minute basis.
“The traders love volatility because that’s what generates their revenues, but for investors it is just frustrating,” he said.
Economists said that, after third-quarter growth was revised higher to a 2.7 percent annual pace, the signs are that the fourth quarter could slow to less than half that pace — especially as businesses hold back from investment due to fears over the fiscal cliff.
“Indeed, the Fed’s latest Beige Book report indicated that regional business activity is being held to a ‘measured’ pace in part by fiscal cliff uncertainty and the impact of Hurricane Sandy. As such, we expect Q4 growth of only around 1 percent,” IHS Global Insight economists Paul Edelstein and Nigel Gault said on Friday.
That makes economic data in the coming week more important for formulating a picture of the final quarter. Tomorrow will see releases of construction spending data for October, auto sales numbers for last month and the Institute for Supply Management’s (ISM) manufacturing index for last month.
On Wednesday come productivity figures and the ISM services sector index, and then on Friday the crucial job creation and unemployment numbers for last month. Those could show a hit from Hurricane Sandy.
However, the political showdown over the fiscal cliff and deficit reduction will still dominate the news.
“Markets will probably have to accept a few more weeks of brinkmanship before a deal is done. In the meantime, statements by public officials will swing equity markets to and fro,” IHS said.