NEW YORK, Dec 23 (Reuters) - Wall Street traders are going
to have to pack their tablets and work computers in their
holiday luggage after all.
A traditionally quiet week could become hellish for traders
as politicians in Washington are likely to fall short of an
agreement to deal with $600 billion in tax increases and
spending cuts due to kick in early next year. Many economists
forecast that this "fiscal cliff" will push the economy into
recession.
Last Thursday's debacle in the U.S. House of
Representatives, where Speaker John Boehner failed to secure
passage of his own bill that was meant to pressure President
Barack Obama and Senate Democrats, only added to worry that the
protracted budget talks will stretch into 2013.
Still, the market remains resilient. Friday's decline on
Wall Street, triggered by Boehner's fiasco, was not enough to
stop the S&P 500 from posting its best week in four.
"The markets have been sort of taking this in stride," said
Sandy Lincoln, chief market strategist at BMO Asset Management
U.S. in Chicago, which has about $38 billion in assets under
management.
"The markets still basically believe that something will be
done," he said.
If something happens this week, it will come in a short time
frame. Markets will be open for a half-day on Christmas Eve,
when Congress will not be in session, and will be closed on
Tuesday for Christmas. Wall Street will resume regular stock
trading on Wednesday, but volume is expected to be light
throughout the rest of the week with scores of market
participants away on a holiday break.
For the week, the three major U.S. stock indexes posted
gains, with the Dow Jones industrial average up 0.4
percent, the S&P 500 up 1.2 percent and the Nasdaq
Composite Index 1.7 percent higher.
This year - with just five trading sessions left in 2012 -
stocks have booked solid gains: The Dow has advanced 8 percent
so far, while the S&P 500 has climbed 13.7 percent, and the
Nasdaq has jumped 16 percent.
IT COULD GET A LITTLE CRAZY
Equity volumes are expected to fall sharply this week. Last
year, daily volume on each of the last five trading days dropped
on average about 49 percent, compared with the rest of 2011 - to
just over 4 billion shares a day changing hands on the New York
Stock Exchange, the Nasdaq and NYSE MKT in the final five
sessions of the year from a 2011 daily average of 7.9 billion.
If the trend repeats, low volumes could generate a spike in
volatility as traders keep track of any advance in the cliff
talks in Washington.
"I'm guessing it's going to be a low-volume week. There's
not a whole lot other than the fiscal cliff that is going to
continue to take the headlines," said Joe Bell, a senior equity
analyst at Schaeffer's Investment Research in Cincinnati.
"A lot of people already have a foot out the door, and with
the possibility of some market-moving news, you get the
possibility of increased volatility."
Economic data would have to be way off the mark to move
markets in the coming week. But if the recent trend of
better-than-expected economic data holds, stocks will have
strong fundamental support that could prevent selling from
getting overextended even as the fiscal cliff negotiations grind
along.
Small and mid-cap stocks have outperformed their larger
peers in the last couple of months, indicating a shift in
investor sentiment toward the U.S. economy. The S&P MidCap 400
Index overcame a technical level by confirming its close
above 1,000 for a second week.
"We view the outperformance of the mid-caps and the break of
that level as a strong sign for the overall market,"
Schaeffer's Bell said.
"Whenever you have flight to risk, it shows investors are
beginning to have more of a risk appetite."
Evidence of that shift could be a spike in shares in the
defense sector, expected to take a hit as defense spending is a
key component of the budget talks.
The PHLX defense sector index hit a historic high on
Thursday, and far outperformed the market on Friday with a dip
of just 0.26 percent, while the three major U.S. stock indexes
finished the day down about 1 percent.
Following a half-day on Wall Street on Monday ahead of the
Christmas holiday, Wednesday will bring the S&P/Case-Shiller
Home Price Index. It is expected to show a ninth-straight month
of gains.
U.S. jobless claims on Thursday are seen roughly in line
with the previous week's level, with the forecast at 360,000 new
filings for unemployment insurance, compared with the previous
week's 361,000.
(Wall St Week Ahead runs every Sunday. Questions or comments
on this column can be emailed to:
rodrigo.campos(at)thomsonreuters.com)