Sunday, November 20, 2011

How will lack of a deficit deal impact the markets

AFAICT, it looks as if the failure to reach a deal on how to cut the federal deficit will be mostly a moot point for the markets. Sure, there are probably traders and speculators more than willing to use any negative news as an excuse to push the market down, but according to Bloomberg, Moody's Analytics' economist Mark Zandi said "I don't think there'd be much of a reaction" by markets to a supercommittee failure to agree on a plan. He said "It's all relative to expectations" and investor expectations with regard to the committee "have been and are still very, very low."
 
We could even see a modest rally in relief that the uncertainty of the outcome of the supercommittee's deliberations is finally resolved.
 
OTOH, lingering uncertainty about any contagion from the European debt crisis and uncertinty about the economic outlook in the U.S. could be a continuing drag on the stock market, although one would think that much of that uncertainty should already have been priced into the market.
 
One other lingering uncertainty for 2012 is whether certain existing tax cuts, unemployment aid, and the payroll tax cut will simply expire at the end of this year or whether Congress may agree to extend them again for 2012. If not extended, the economy could take a hit of some degree for 2012. These are different from the Bush tax cuts which automatically expire at the end of next year (end of 2012.)

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