Wall Street will kick off 2013 where it left off in 2012, with investors basing the bulk of their decisions on the nation's fiscal outlook. The last trading day of 2012 ended on a bullish note Monday, with the U.S. stock market rallying nearly 2% amid renewed hopes that Washington lawmakers would cobble together an 11th-hour deal to avoid the full effects of the economy-damaging tax increases and spending cuts known as the fiscal cliff. The market had fallen the five previous sessions amid dimming optimism for an agreement.
Late Tuesday, the House passed a Senate bill to roll back some tax increases and automatic spending cuts, but Congress still faces the challenge of balancing revenue and spending.
For the year, all of the major U.S. stock indexes shrugged off uncertainties, such as the fiscal cliff, U.S. elections, Europe's debt crisis and concerns about global growth, and finished 2012 solidly higher. The biggest winner was the technology-dominated Nasdaq composite, which gained 15.9% in 2012. The Standard & Poor's 500, the benchmark large-company stock gauge, shot up 13.4%. The Dow Jones industrial average rose 7.3%.
The steps lawmakers eventually take in coming months to tackle the USA's mushrooming deficit could determine the direction of the stock market this year, says Russ Koesterich, global chief investment strategist at BlackRock.
"Our basic investment thesis for 2013 is that it will be a reasonably good year if we can avoid falling off the fiscal cliff," Koesterich told USA TODAY. "Avoiding the (full force) of the fiscal cliff removes a big unknown for investors and a major headwind for consumers."
If most Americans aren't hit with draconian tax increases, they are more likely to continue spending, which will give the recovering economy a boost, adds Gary Thayer, chief macro strategist at Wells Fargo Advisors. But what the market would like even more is if Washington politicians agree on raising the nation's debt limit and tackle the nation's deficit with an intelligent plan to rein in spending without short-circuiting the economic recovery, he adds.
"A budget agreement," Thayer says, "would probably prevent the U.S. economy from going into recession as many investors feared."
The general thinking on Wall Street is that if politicians can get the policy part of the equation right in 2013, the stock market is poised to move higher.
The reason: The economy, which grew at a 3.1% pace in the third quarter of 2012, is showing signs of life and will gain speed if CEOs and consumers start investing and spending more as policy uncertainty fades.
Couple that with a vastly improving housing market, low inflation and interest rates, and a market trading at a price-to-earnings multiple of just 12.5%, vs. a long-term average of 15 times earnings, and stocks could be on track for another good year.
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