U.S. stocks rally as investors scrutinize nation’s budget discussions

TradingPub Admin | December 17, 2012

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Stocks have repeatedly suffered as a result of uncertainty surrounding U.S. budget negotiations, but equities rallied on December 17 as investors scrutinized communications for signs of progress.

The S&P 500 Index, which is considered a benchmark index for equities, was trading 1.2 percent higher at 1,430.45 at 4 p.m. in New York.

Discussion Headway 

CNNMoney reports that these assets moved up in value as investors responded favorably to signals that U.S. lawmakers are making headway in their negotiations. According to a source that spoke with CNN, House Speaker John Boehner has stated that he is open to extending the ceiling on the national debt for one year in order to lower the budget deficit.

The White House did not respond enthusiastically to this news, but said that the offer represented "progress." However, Helen Fessenden, an analyst at political risk research firm Eurasia Group, offered a far rosier interpretation of the move, the media outlet reports.

Fessenden stated that Boehner's offer "fundamentally" changes the fiscal cliff discussions, and said that "it not only means that a series of interlocking trade-offs can be considered in pursuit of a deal but it also signals that the Speaker ultimately believes a deal can be reached."

Impact of Negotiations 

Bloomberg reports that the political uncertainty caused by the federal budget negotiations has caused the blue-chip S&P 500 to fall 0.7 percent so far in the final quarter of 2012, which represents the second-poorest performance of any of the 24 indices representing developed markets.

The group of stocks is currently trading at 14.6 times reported earnings, compared to the ratio of 16.4 since 1954. These lower values for the S&P 500 come even after the group of stocks has risen 14 percent in 2012.

Boehner and President Barack Obama have provided differing solutions on how to resolve the budget concerns and avoid going over the fiscal cliff. If lawmakers are unable to resolve their budgeting differences, it will result in more than $600 billion in higher taxes and cuts to budget spending being automatically put into effect starting on January 1, 2013.


CNNMoney reports that many investors are worried that lawmakers will fail to resolve their differences until they are almost out of time.

"They're going to come up with a solution closer to the end of the year," Bernard Kavanagh, vice president of portfolio management for St. Louis-based broker Stifel Nicolaus, told the news source. "It's political suicide if they don't."

On a lighter note, Kavanagh predicted that equities are in store for a rally in 2013 as they are currently being traded at valuations that make them appealing to investors. He stated that "we're pretty bullish going into next year."

Key Disagreement 

One area that lawmakers had repeatedly become stuck on was raising taxes on high wage earners. Currently, individuals making more than $200,000 per year and families making more than $450,000 per year are eligible for tax credits. This policy has generated substantial visibility, and President Barack Obama has repeatedly called for its repeal.

He even pointed to his reelection as validation that the majority of Americans believe that these "tax cuts for the rich" should be repealed. Boehner had continually refused to consider repealing these tax breaks, but said in the last few weeks that he is now open to eliminating these tax credits. This concession could open the door for lawmakers to make the agreements needed to avoid the fiscal cliff.

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