(MoneyWatch) Investors enter the last full week of the year with good news and bad news. Let's start with the good news: The world did not end, as some say the Mayan calendar predicted. The bad news was progress on the so-called "fiscal cliff" faded away. After the cancellation of a House vote on Speaker John Boehner's so-called Plan B, it was clear that Washington politicians gave us a lump of coal for Christmas.
After a holiday break, it's back to the fiscal cliff drawing board for lawmakers and President Barack Obama. Although there are two components of the cliff, tax increases and spending cuts, the tax side seems to garner more attention. By last Wednesday, Speaker Boehner had agreed to tax rate increases for those earning more than $1 million annually, or roughly a quarter of one percent (0.23 percent) of all taxpayers; and President Obama was willing to define wealthy taxpayers as those who earn over $400,000. A deal was in sight, or so we thought.
Despite the huffing and puffing about tax rate increases, economists note that raising tax rates on the wealthy would be a mere pittance, when compared to the size of the annual deficit and national debt. The juicier and more contentious part of the debate centers on government spending. But with enormous and popular programs like Medicare on the chopping block, and with the end of the year around the corner, it's hard to see how the politicians can come to an agreement on wholesale changes in government spending in the week ahead.
What happens if no deal occurs? After Jan. 1, all tax rates will reset to 2001 levels. Then, Congress and the president could hatch a plan to reverse the income tax increases on all but the wealthiest earners. The plan could also include a general agreement on spending, with details to be ironed out by some date in the not-so-distant future. If that process were to occur quickly, the economy should be fine, though the stock market might whip around a bit.
In fact, but for the politicians, the economy is doing pretty well. Third quarter growth was revised higher to 3.1 percent from the previous estimate of 2.7 percent; personal income and spending both increased more than expected in November, despite a drop off in consumer confidence; existing homes sales rose 5.9 percent to a seasonally adjusted annual rate of just over 5 million in November, and are 14.5 percent higher from a year ago; and orders for durable goods were up on strength of business investment. This week, data on home prices, new home sales and pending home sales should confirm that the housing recovery is finally underway.
-- DJIA: 13,190, up 0.4 percent on week, up 8 percent on year
-- S&P 500: 1,430 up 1.1 percent on week, up 13.7 percent on year
-- NASDAQ: 3,021 up 1.7 percent on week, up 16 percent on year
-- January crude oil: $88.66
-- February gold: $1,660.10
-- AAA nat'l average price for gallon of regular Gas: $3.24
THE WEEK AHEAD:
Mon 12/24: U.S. markets close 1 PM
Tues 12/25: MARKETS CLOSED FOR CHRISTMAS
9:00 Case-Schiller Home Price Indexes
8:30 Weekly claims
10:00 New home sales
10:00 Consumer confidence
9:45 Chicago Purchasing Managers Index
10:00 Pending home sales