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U.S. Stocks Gain As Lawmakers Scramble To Avert Fiscal Cliff

U.S. stocks rose in value on the last day of 2012, as Washington lawmakers made a last-ditch effort to come to some sort of resolution that would prevent the nation's economy from going over the fiscal cliff.

Stocks Rise 
Bloomberg reports that the blue-

U.S. stocks rose in value on the last day of 2012, as Washington lawmakers made a last-ditch effort to come to some sort of resolution that would prevent the nation's economy from going over the fiscal cliff.

Stocks Rise 
Bloomberg reports that the blue-chip S&P 500 Index was trading 0.8 percent higher at 1,414.02 at 2:22 p.m. in New York. The trading volume of the companies represented in the group of stocks was 11 percent lower than its 30-day average for this time of day. At the time, the Dow Jones Industrial Average was up 0.4 percent at 12,990.96.

The Dow had surged as much as 99 points higher earlier in the day, but lost most of these gains to trade at 12,973 at 2 p.m., according to The Associated Press. At that point in the day, the Nasdaq composite index 29 points higher at 2,989 and the S&P 500 was at 1,411.

Progress in Negotiations 
These equities had opened largely unchanged but then rose in value as reports circulated that the rough outline of a compromise had been ascertained, the media outlet reports. 

President Barack Obama helped encourage market participants earlier in the day when he stated that attaining a deal was not too far off, but that these dealings were not completed, according to the news source. He implored lawmakers to finalize some sort of agreement.

Worst Case Scenario 
"The fiscal cliff is the worse-case scenario, and if we have something better than that, then that’s a positive," Walter "Bucky" Hellwig, who contributes to the management of around $17 billion of assets at Birmingham, Alabama-based BB&T Wealth Management, told Bloomberg. "I think we will get a deal. How do we sort that out and the tightening effect on the economy, that will be what the market responds to after the deal."

If lawmakers are unable to come to an agreement before the deadline, more than $600 billion in federal spending reductions and tax increases will be automatically triggered come January 1.

These combined fiscal challenges are widely expected to have a significant negative impact on the economy, with the Congressional Budget Office predicting in a report released earlier in the year that the event would cause the U.S. to fall into recession.

Market Sentiment 
While the changes to fiscal policy would impact the economy, the failure to negotiate could be more harmful to the sentiment of investors, according to U.S. News and World Report.

"We're having a fragile recovery, with the pain of 2008 still fresh on everybody's mind," Joe Heider, principal at Rehmann Group near Cleveland, told the news source. "It's fear of the unknown. And fear is one of the greatest drivers of the financial markets."

How exactly equity markets would be impacted by going over the cliff is uncertain, as investors pushed stocks slowly higher between mid-November and mid-December, even though they knew that the time left to come to an agreement was dwindling. As the last month of the year started to wind down, investors became truly concerned about the potential impact of the budget negotiations.

Some investors think that the potential threats involved in the fiscal cliff are overemphasized, believing that the combined forces of higher taxes and lower spending would be modest, the media outlet reports. Many of these market participants believe that if lawmakers cannot determine their terms on time, they can always pass retroactive legislation after the New Year.

What actions will you take to hedge your portfolio from the potential risks associated with the fiscal cliff? 

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