Traders, big investors and strategists in the United States and
around the world are paying close attention as anxiety rises over
the budget impasse in Washington.
It was supposed to be an easy week.
Between Christmas and New Year's Day, Wall Street usually goes on hiatus. Trading volume is typically light. And stocks often rise.
But traders, big investors and strategists in the United States and around the world are paying close attention to their Bloomberg terminals and BlackBerrys this year, as anxiety rises over the budget impasse in Washington.
The U.S. Senate plans to resume discussions Thursday on what has been called the fiscal cliff, the combination of tax increases and spending cuts that begins Jan. 1. Without a deal on the table, Wall Street is worried that the economic uncertainty will create turmoil in the final trading days of the year.
On Christmas Eve, Quincy Krosby, chief market strategist at Prudential Annuities, had a laptop alongside the ingredients for apple cake in her rural Connecticut kitchen. "I just go back and forth between watching my apples and watching the markets," said Ms. Krosby, who was technically on vacation. "Everyone is on call."
Wall Street is playing the waiting game.
In recent weeks, stocks around the world have moved higher, partly in anticipation that President Barack Obama and Congress would reach a compromise on the budget. But then the talks collapsed last week. Stocks in the United States, Britain and Asia, excluding Japan, underwent their sharpest drop in more than a month Friday after John A. Boehner, speaker of the House, failed to summon support from Republicans for a plan to raise taxes on the wealthiest households.
Now, investors around the world are watching to see what comes next.
On Wall Street, some players are creating portfolio contingency plans if a deal does not materialize and stocks plunge. Others are reducing their exposure to stocks that could be particularly vulnerable, like financial or energy companies. Opportunists are drawing up buy lists, figuring that bargains will emerge.
"The laptop this week becomes your American Express -- you don't leave home without it," said Larry Peruzzi, senior equity trader at Cabrera Capital Markets. "This Congress -- if it's taught us nothing else -- has taught us you've got to be prepared. Because when you think you've figured them out, they're going to do something else and surprise you."
On Monday, the floor of the New York Stock Exchange was busy for a Christmas Eve, as traders ate free bagels and gathered to sing "Wait Till the Sun Shines, Nellie," an annual tradition.
Jonathan Corpina, who works on the floor for Meridian Equity Partners, said that on half days like Monday, traders are usually on cruise control, with no big movements. This year, he said the floor was "a little louder today than it normally has been," given the negotiations in Washington. "There are more people who have given up their end-of-the-year vacations," he said.
While trading volume remained light, stocks edged lower, building on market declines that started Friday. The Standard & Poor's 500- stock index ended the day at 1,426.66, off 0.24 percent, or 3.49 points. Even so, the S.&P. 500 is still up more than 13 percent for the year. The Dow Jones industrial average fell 51.76 points, or 0.39 percent, to 13,139.08, and the Nasdaq composite index dropped 8.41 points, or 0.28 percent, to 3,012.60.
If the weakness persists, the markets may not provide their usual holiday lift for investors. Since 1950, U.S. equities have risen an average of 1.5 percent in the days after Christmas, in what is referred to by the Stock Trader's Almanac as the Santa Claus rally. The atmosphere is reminding some of August 2011, when negotiations in Washington over the debt ceiling led traders to cancel their summer plans. Trading activity picked up as the deadline drew closer and stocks dropped significantly.
Many expect that politicians will come up with a short-term solution to avert the tax increases and spending cuts.
But the announcement may not come until the last minute, keeping Wall Street on edge until then.
"What the market is expecting at this point is a stopgap measure," said Ms. Krosby. "Market activity suggests that investors believe there will be some sort of announcement."
In the meantime, investors and traders are assessing their portfolios. With taxes on capital gains likely to rise next year, some wealthier individuals are selling winning positions to lock in the current rates.
"Usually, people are doing anything they can to avoid locking in gains," said Oliver Pursche, president of manager at Gary Goldberg Financial Services. "It's the exact opposite this year."
Mr. Pursche said he usually took a vacation between Christmas and New Year's. This year, he planned to be in the office Wednesday so that he could be ready to act on any announcements out of Washington.
His firm has 15 percent of its assets in cash. If politicians do not reach an agreement and the markets drop, Mr. Pursche plans to use half the money to buy stocks. In Mr. Pursche's view, concern over the budget impasse has distracted investors from recent indicators that the American economy is strengthening. He points, in part, to the falling unemployment rates and the rise in personal income.
But not everyone is so sanguine. David Rovelli at Canaccord Genuity said his firm had devised lengthy instructions for clients, detailing what stocks to sell under different outcomes.
On Monday, Santa Claus rang the closing bell at the New York Stock Exchange, with the jazz trumpeter Chris Biotti offering a rare moment of holiday cheer for the markets. It was the worst pre- Christmas trading day for U.S. stocks since 2006.
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