By Ryan Vlastelica
NEW YORK Jan 1 U.S. stocks are poised for gains
to begin the year after the late passage of a bill to avoid
harsh tax hikes that would have hit most Americans and crimped
However, harsh reality awaits any euphoria that comes from
avoiding the "fiscal cliff". In two months, battles over further
spending cuts and, in particular, the U.S. federal debt limit
will come to a head.
The House of Representatives voted for a bill passed on
Monday by the Senate that will raise taxes on wealthy
individuals and families and preserve certain other benefits
that will, together, soften some of the blow that would have
been sustained without an agreement to avoid the fiscal cliff.
That puts Wall Street in prime position to begin 2013 with a
rally, even if thorny issues remain to be addressed in the
coming months in Washington.
Asian markets extended gains modestly, with the MSCI Asia
Pacific ex-Japan index of stocks up 1.7 percent.
U.S. markets will not have a chance to react until 6 a.m. ET,
when futures trading begins after the New Year's Day holiday.
"When you separate the fundamentals of the economy from the
headlines, the fundamentals really suggest we can support higher
prices in the new year," said Bill Vaughn, equity portfolio
manager at Evercore Wealth Management in San Francisco.
The Standard & Poor's 500 stock index ended
the year up 13 percent, its best gain since 2009, mostly
shrugging off the debt-related worries that dominated headlines
during the year.
Equity markets held up in the last two months of the year as
well, expecting a resolution to head off $600 billion in
spending cuts and tax hikes that could push the economy into
recession if they stay in effect for long. While the deadline to
avert the cliff was Dec. 31, legislation can be formulated to
retroactively prevent going over.
The back-and-forth in recent weeks has primarily been of
concern to businesses, where confidence has eroded. Some slowing
in economic growth due to the impasse is expected, but that may
play into the hands of value investors if the market corrects in
"It appears as though politics will dominate for some time,"
said Richard Bernstein, chief executive of Richard Bernstein
Advisors in New York. "That being said, equity market valuations
already reflect this ... the stock market is attractive from my
Stock markets around the world were closed Tuesday because
of New Year's Day. Some Republicans in the House had expressed
concern on Tuesday afternoon that a bill would not be finished
before U.S. markets open.
Many traders will still be away from their desks because of
the holiday, indicating trading volume will stay near its recent
low levels. The anemic action, coupled with uncertainty over the
cliff, resulted in a spike of volatility in December, with the
CBOE Volatility index jumping 13.5 percent in the month.
DEBT CEILING BATTLE REMAINS
The bill that passed does not contain the kind of spending
cuts that many conservative Republicans favor in order to bring
down the high U.S. federal debt.
Even as this battle recedes, markets will look ahead to
another fight in the next few months, this time over whether
Congress will approve an increase in the U.S. debt ceiling.
The White House has said it will not negotiate the debt
ceiling as in 2011, when the fight over what was once a
procedural matter preceded the first-ever downgrade of the U.S.
credit rating. But it may be forced into such a battle again. A
repeat of that war is most worrisome for markets.
"The spending side fight looms and it will be tougher," said
David Kotok, chairman and chief investment officer at Cumberland
Advisors in Sarasota, Florida. "The Republican caucus is tighter
on that side."
Markets posted several days of sharp losses in the period
surrounding the fight in 2011. Even after a bill to increase the
ceiling passed, stocks plunged in what was seen as a vote of "no
confidence" in Washington's ability to function, considering how
close lawmakers came to a default.
Economists at Goldman Sachs, in a note Tuesday, said the
coming fight to raise the debt ceiling -- where Republicans are
likely to demand spending cuts while President Obama pushes for
more taxes -- "is likely to be at least as politically difficult
as the last increase was in the summer of 2011."
During this fight, the markets have been less volatile,
largely because the effects of the spending cuts and tax hikes
will be gradual, and there was an ongoing expectation that a
retroactive fix was in the offing.