Any fiscal-cliff resolution is being seen as nothing more than a “bare-bones” extension approved by the end-of-the-year deadline.
“The market had been fairly confident there will be a deal,” said Russ Koesterich, managing director and chief investment strategist at BlackRock (BLK). “We're still cautiously optimistic we will get a deal on or around the start of the year, but it is likely to be bare bones.”
President Barack Obama met for just over an hour Friday with Republican House Speaker John Boehner and Senate Minority Leader Mitch McConnell, and Democratic Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi. Treasury Secretary Timothy Geithner also participated in the meeting, said an administration official who spoke on condition of anonymity.
Mr. Obama is seeking an up-or-down vote on his proposal to extend tax cuts for annual income up to $250,000, absent a counteroffer from congressional leaders, an official familiar with Friday’s budget talks said.
The president is asking for an interim plan to avert more than $600 billion in tax and spending changes in 2013, along with an extension of expanded unemployment benefits and other programs, said the official, who spoke on condition of anonymity.
Stocks fell in late trading Friday as the session closed without any word of a breakthrough in negotiations. The Dow Jones industrial average fell 158.20, or 1.21%, to close at 12,938.11; the S&P 500 was down 15.67, or 1.1%, to 1,402.43; and the Nasdaq composite closed down 25.60, or 0.86%, at 2,960.31. All numbers are preliminary.
Mr. Koesterich thinks tax rates and the dividend and capital gains rates likely will be extended, but the absence of a “grand bargain” leaves uncertainty in the markets with what is likely to be a heated debate on raising the debt ceiling.
The deal will at least “significantly mitigate the full damage of the fiscal cliff,” but the market reaction will be fairly muted, Mr. Koesterich said in a telephone interview.
How the market reacts will largely depend on how close Congress has come together in at least outlining how a comprehensive deal would work, said Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income.
“Hopefully we'll see some pathway to more moderate policy,” Mr. Tipp said in a telephone interview. “If not, it could be a bumpy last day of the year on Monday and bumpy start of the year.”
The “silver lining” is that an extension would give Congress more time to avoid adverse consequences with cutting retirement plan incentives and raising PBGC premiums, said Geoff Manville, principal, government relations, at Mercer.
“Anything that gives more time to demonstrate the value of retirement fund incentives is a good thing for us,” Mr. Manville said in a telephone interview. “What we didn't want was a deadline-driven rush to judgment … and have some bad policy decisions made.”
Any kind of minimal deal or extension should not result in a big market rally, Mr. Koesterich said, as most investors had expected some deal to be made. The failure of a comprehensive deal will likely create a headwind for U.S. growth in 2013 with corporate earnings estimates likely reduced, he added.
Mr. Manville agreed with that sentiment and said the fiscal cliff will only be the beginning of a “year's work of budget and tax battles.”
“I think the markets have built a week or two into the process,” Mr. Manville said. “If it gets into mid-January, we could see some adverse consequences to the market.”
Bloomberg News contributed to this story.