Published Monday, Dec. 31, 2012 | 11:06 a.m.
Updated Monday, Dec. 31, 2012 | 12:44 p.m.
NEW YORK — The stock market shot higher on Monday afternoon, in the year's final hour of trading, signaling that investors believe the politicians in Washington will work out a budget compromise to avoid the "fiscal cliff."
The Dow was up 137 to 13,075 in the late afternoon, more than 1 percent. The Standard & Poor's 500 and the Nasdaq composite were up by more, with the Nasdaq rising nearly 2 percent.
It was a high note in what had been a choppy day for the market, as choppy as the "fiscal cliff" deal-making that has been yanking it around.
Stocks opened lower and struggled for direction in the morning. They jerked higher at midday, on reports that the bare outline of a deal to avoid the "cliff" had been knit together. Then, they lost some of those gains when President Barack Obama made an early afternoon appearance to say that a compromise was "within sight," but not finalized. Then, in the late afternoon, they shot higher.
The market's indecisiveness overlaid a day of dramatic budget negotiations in Washington. If Republicans and Democrats can't agree to a new budget deal by midnight, then higher taxes and lower government spending will automatically kick in Tuesday — the so-called fiscal cliff.
That would hurt the economy and could even send it back into recession, many investors believe. But what might hurt more, they add, is the psychological impact of knowing that the government can't agree on a budget.
"We're having a fragile recovery, with the pain of 2008 still fresh on everybody's mind," said Joe Heider, principal at Rehmann Group outside Cleveland. "It's fear of the unknown. And fear is one of the greatest drivers of the financial markets."
The Dow Jones industrial average surged 99 points in midday trading after The Associated Press reported that Republicans and Democrats had agreed on some key aspects of a compromise budget plan. They cooled after Obama made it clear that a deal wasn't done. Then, around 2:45 p.m. EST, they started shooting higher again.
Shortly after 3 p.m. EST, the Standard & Poor's 500 index was up 21 to 1,423 and the Nasdaq composite index was up 57 to 3,017.
Investors' opinions about the "fiscal cliff," and how much it matters, are varied.
Some are unruffled: They're confident that politicians will work out a last-minute deal, as they often do. Or they think that even if the U.S. does go over the "cliff," it would be more akin to the anti-climactic Y2K scare than a true Armageddon. The "cliff's" impact would be felt only gradually, they reason. For example, workers might get more taxes withheld from their first couple of paychecks in the new year, but it's not as if they'd have to pay all their higher taxes up front on Tuesday. And Congress could always retroactively repeal those higher taxes.
Others are more concerned. The higher taxes and lower government spending could take more than $600 billion out of the U.S. economy and send it back into recession. Politically, the U.S. would send a message that its lawmakers can't cooperate. And investors would have no good read on the country's long-term policy for taxes and spending, or how the government plans to eventually trim its deficit.
That's made the fiscal cliff's impact on the stock market uneven. From mid-November through roughly mid-December, the stock market rose more or less steadily, despite the "cliff" looming on the horizon. It wasn't until shortly before Christmas, with still no deal in sight, that the "cliff" finally scared investors enough to send the market down.
Tim Speiss, partner in charge of the personal wealth advisers practice at EisnerAmper in New York, followed the "cliff" negotiations on Monday and wondered if the U.S. would get its debt rating cut again. The Standard & Poor's ratings agency cut its rating of the U.S. government amid similar negotiations in August 2011, when lawmakers were arguing over the government's borrowing limit. S&P said at the time that the "political brinksmanship" highlighted how "America's governance and policymaking (is) becoming less stable, less effective, and less predictable." Its rating cut sent the stock market into a tailspin.
The other major ratings agencies, Moody's and Fitch, have suggested that they might lower their ratings of the U.S. because of the "fiscal cliff."
"That is, unfortunately, the big story," Speiss said.
It's also one of the only stories. There's been little other news to trade on during the holiday season, giving the "fiscal cliff" drama outsized influence. No major companies are scheduled to report earnings this week. The most significant economic indicator scheduled for this week, the government's monthly jobs report, won't be released until Friday.
Trading volume has also been light, with many investors still on vacation. That also makes the market more volatile: With fewer shares trading hands, it can be moved by relatively small trades.
Last week, about 2.2 billion shares traded hands each day on average. Throughout the year, the average has been closer to 3.6 billion.
The yield on the benchmark 10-year Treasury note rose to 1.76 percent from 1.70 percent late Friday, a sign that investors were moving money into stocks.
Some of the best-performing stocks for the year were those that had been hammered in 2011. Homebuilder PulteGroup, appliance maker Whirlpool and Bank of America all more than doubled over the year, after falling by double-digit percentages in 2011.
Some of the worst performers of the year were Best Buy, Hewlett-Packard and J.C. Penney. All are struggling to keep up with competitors who have adapted more quickly to changing technologies and changing customer tastes. They were all up Monday, but were each down at least 45 percent for the year.