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November 19: Optimism on Fiscal Cliff Talks

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Market participants have taken solace from the ‘constructive’ talks between the White House and Congressional leaders on Friday on the ‘Fiscal Cliff’ issue. This gave us a positive trading session on Friday and the momentum will likely carry into today’s session as well.

‘Fiscal Cliff’ related developments aside, we are relatively light on economic data this holiday shortened week, with the markets closed on Thursday and open only half of the day on Friday. While light volumes ahead of the Thanksgiving holiday may exaggerate market swings, it is unlikely that we will see a definitive breakout either way this week.

Progress on the fiscal questions facing the nation will no doubt serve as a catalyst for this market. But I remain skeptical of the notion that we will get back to the year’s highs once this issue is behind us. Corporate earnings growth, a dependable prop for this market over the last three years, appears to have given way to a far more uncertain earnings backdrop, but few seem to acknowledge it at this stage. Earnings expectations have been coming down, but mostly for the last quarter of the current year and not by much for next year. Hard to envision the market making significant gains, even without the ‘Cliff drag’, in a down-trending earnings environment.

Existing Home Sales are scheduled for release today at 10:00 AM EST. Our consensus estimate shows this indicator is expected to decrease to 4.74 million from the annual pace of 4.75 million reported in September.



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