COUNTDOWN TO FISCAL CLIFF

Investors got their first taste this past week of how press events from the Obama administration and members of Congress over negotiations shifted markets. Expect those markets to get even more sensitive to the political drama in the coming week as the Dec. 31 deadline approaches.“You’d quickly have a crisis panic situation affecting the market, and that’s the only thing that moves politicians,” said Scott Wren, senior equity strategist at Wells Fargo Advisors. Under those circumstances, Wren wouldn’t expect a stock market drop of more than 10% as politicians scrambled to slap a Band-Aid on the situation. Morgan Stanley’s Slimmon sees the negotiations through the lens of the summer of 2011, when debt-ceiling squabbles forced a 16% pullback in stocks. While a 5% pullback is possible in December over further squabbles, he doesn’t see much more than that because too many investors got burned by selling into the political infighting back in 2011. Wren expects some sort of compromise mix of tax hikes and spending cuts using the Simpson-Bowles commission plan as a template but not before the end of the year. As for the coming week, he anticipates the market will react to the politicians stepping up to the microphone, and a very quiet volume week if nothing happens. “It’s only inevitable that anxiety will build over the next few weeks,” said Andrew Slimmon, managing director of global investment solutions at Morgan Stanley Wealth Management.