Stocks Drop During Last Week in December Amid Fiscal Cliff Concerns

Stocks Drop During Last Week in December Amid Fiscal Cliff Concerns

U.S. stocks declined on December 28, causing these equities to register a loss during the week ending on that day, as market sentiment was roiled by concerns about the looming fiscal cliff.

Falling Stocks 
Equity declines were observed in various indices, as the Dow Jones Industrial Average closed 1.21 percent lower at 12,938.11 on December 28. The blue-chip S&P 500 Index finished trading down 1.1 percent at 1,402.43.

The declines the U.S. stocks registered on Friday resulted in the S&P 500 suffering a 1.3 percent loss during the week, Reuters reports. This was the worst week for this index since mid-November. Also, the continued declines the S&P 500 suffered on December 28 resulted in the group of stocks recording its longest drop in three months.

"We've been whipsawing around on low volume and rumors that come out on the cliff," Eric Green, senior portfolio manager at Penn Capital Management in Philadelphia, told the media outlet.

On Thursday, stocks fell by more than 1 percent after markets were roiled by a statement made by Senate Majority Leader that lawmakers had a low chance of resolving their budget differences before the deadline of January 1, according to the news source.

Time Running Out
Since lawmakers were unable to reach a resolution to their budget disagreements so far, President Barack Obama had made plans to convene with House Republicans and other members of Congress on December 30, so that these Washington officials could continue their efforts, the media outlet reports.

Failure to negotiate an agreement will result in the automatic triggering of more than $600 billion worth of higher taxes and spending cuts for the U.S. federal budget. If these changes happen, it is expected by many market experts to have a significant negative cost for the nation's economy.

A Congressional Budget Office report released earlier in the year mirrored this concern, specifying that going over the cliff will likely cause the current U.S. economic recovery to reserve in direction and turn into a recession.

"Time is running out for the long-awaited solution in fiscal-cliff negotiations," Kai Fachinger, who contributes to the management of around $700 million at SAM Sustainable Asset Management AG, told the news source. "As the positions of the two parties are just too far off, it's likely to happen at the very last second. In a worst- case scenario, the negotiations will continue into early 2013 and stock markets will open very volatile into the new year."

Investor Sentiment 
The existing budget negotiations have been garnering substantial visibility from the investment community, and CNN Money reports that many of these market participants would prefer that lawmakers reach some sort of agreement that will keep at least some of the existing tax cuts in place.

"A lot of people are thinking about capital gains consequences and holding positions beyond this year," Mark Helweg, founder of financial tech company MicroQuant, told the news source.

Markets have been impacted significantly by the uncertainty surrounding this issue, as the S&P, Dow and Nasdaq all finished the week ending December 28 lower and were on track to end the month at a loss.

Short-Term Fix 
Reuters reports that since the amount of time is running low, lawmakers might allow the nation to go over the cliff and then make an effort to legislation approved that would retroactively reduce taxes to the level they had before January 1.

"The market doesn't think this will go on for months... it is pretty optimistic something will happen next week," Green, who contributes to the management of $7 billion, told the news source.

What are you doing to manage risk amid the potential tax hikes and spending cuts that could be caused by the looming fiscal cliff?