As 2012 gets ready to close, confidence over a quick resolution to the fiscal cliff weighed on investors and consumer sentiment.
The Volatility Index has been rising higher as the Dec. 31 deadline approaches for when the U.S. heads over the fiscal cliff. The VIX, based on index option prices, is sometimes referred to as the fear index and represents an expectation of the stock market’s volatility over the next 30 days. On Thursday the VIX rose to 19.47, compared with 15.87 at the end of November.
If nothing is done, expect automatic tax increases and deep spending cuts that were agreed upon as part of the debt ceiling deal reached in 2011. This combined duo is expected to trigger a recession, although lawmakers can still work out a deal early in 2013 and make retroactive changes to the tax and spending laws scheduled to go into effect at midnight on Dec. 31.
There was debate Thursday on what President Obama, who cut short his vacation in Hawaii, intends to do to avoid some of the tax hikes and spending cuts. While Republicans said they were expecting details on a new, scaled-back plan that would be sent to Congress to get the parties negotiating again, the White House dampened that speculation, stating there are no plans to send a proposal to Capitol Hill. The Senate is back in Washington and the House will reconvene Sunday.
Earlier in the day, Sen. Majority Leader Harry Reid (D., Nev.) expressed doubt that a deal could be reached before the upcoming deadline, which sent U.S. equity markets into negative territory. He also called on House Speaker John Boehner (R., Ohio) to call members back from Christmas break.
The political gridlock in Washington is having a clear affect on consumer sentiment, with retailers pointing to the impending cliff as one reason Christmas sales were weaker than expected. The Consumer Confidence Index, a bellwether gauge of American sentiment every month, fell in December by six points.
The reading in December was 65.1, down from November’s 71.5. The expectations component fell the sharpest to 66.5 from 80.9, while the present situation portion rose to 62.8 from 57.4.
The expectations component, or the longer-term outlook, reflects consumer sentiment over the next six months. In contrast, the present situations component, which measures current conditions, is more than 16 points higher than it was in August, according to UBS chief economist Maury N. Harris.
Lynn Franco, director of economic indicators at The Conference Board, said, “Consumers’ expectations retreated sharply in December resulting in a decline in the overall index. The sudden turnaround in expectations was most likely caused by uncertainty surrounding the oncoming fiscal cliff. A similar decline in expectations was experienced in August of 2011 during the debt ceiling discussions.”
October was the best month so far, with an overall index reading of 73.1 that hit a four-year high. November’s initial read of 73.7 was adjusted downward to 71.5 in the December report.
The Dow Jones Industrial Average hit an intraday low of 12,964.08 before gaining back some lost ground following the disclosure that the House will meet on Sunday, with the first House vote set for 6:30 p.m. What the House will vote on exactly wasn’t disclosed. The DJIA cut its loss to just a 0.1 percent decline to 13,096.31.
Among U.S. retail stocks, Bon-Ton Stores Inc. was the top performer, gaining 6.1 percent to close at $11.47. In the red was Pacific Sunwear of California Inc., whose shares lost 8.1 percent to close at $1.36.
In overseas trading, the market indices were mixed.
The Nikkei 225 in Tokyo rose 0.9 percent to 10,322.98, while the Hang Seng Index in Hong Kong inched up 0.4 percent to 22,619.78.
The European markets were flat on the first day of trading following the Christmas break.
As traders kept their eyes fixed on fiscal cliff talks in the U.S., the FTSE 100 in London was flat at 0 percent or 5,954.30 at the close of trading, the CAC 40 in Paris edged up 0.4 percent to 3,674.26, and the FTSE MIB in Milan rose 0.5 percent to 16,408.28. The DAX in Frankfurt, meanwhile, fell 0.2 percent to 7,655.88.