Fears of fiscal cliff could halt December rally

IN normal times, this week’s slew of US economic data could be a springboard for a December rally in the stock market.

December is historically a strong month for markets. The S&P 500 has risen 16 times in the past 20 years during the month.

But the market has not been operating under normal circumstances since 7 November when a day after the US election, investors’ focus shifted squarely to the looming “fiscal cliff”.

Investors are increasingly nervous about the ability of lawmakers to undo the $600bn in tax increases and spending cuts that are set to begin in January.

A string of economic indicators this week, which includes the Institute for Supply Management’s reading of the manufacturing sector today, culminates with the US government’s November jobs report on Friday.

But the impact of those economic reports could be muted. Distortions in the data caused by superstorm Sandy are discounted.

The spotlight will be more firmly on signs from Washington that politicians can settle their differences on how to avoid the fiscal cliff.

Concerns sent the S&P 500 into a two-week decline after the elections, dropping as much as 5.3 per cent, only to rally back nearly four per cent on hopes of a compromise.

The most recent survey by the American Association of Individual Investors showed that although bullish sentiment rose above 40 per cent for the first time since 23 August, bearish sentiment remained above its historical average of 30.5 per cent for the 14th straight week.