There are many wildcards floating around:
1)Extension of the Bush tax cuts. Traders are assuming that there will be at least a one-year extension for all participants, but that is far from certain. The cost of a full extension will be enormous: nearly $200 billion in 2011 alone. Will that be offset with other tax increases?
If the tax cuts are extended, that would likely help consumer spending, so retailers and hotels might benefit.
2) Spending may not be completely dead...Democrats will likely push an infrastructure spending bill, which will benefit steel and building material companies. But new taxes will be needed for that...this will likely be politically unpalatable for Republicans.
3) The estate tax is scheduled to return to a top rate of 55 percent on estates over $1 million in on January 1. Some compromise would help the insurance industry.
4) Other taxes also up in the air. Higher taxes for capital gains, income and dividends for upper-income taxpayers will definitely benefit municipal bonds.
5) There is increased rhetoric around trade protectionism...with job growth scarce, you'll hear more rhetoric that free trade has cost jobs and generated few benefits. There are trade agreements with South Korea, Colombia and Panama that have languished. "[T]rade wars are possible," Tobias Levkovich, Citi's head of equity strategy, wrote in a note to clients.
6) Reforming Fannie and Freddie. The Obama administration is supposed to release its plans in January. A couple weeks ago, there were the usual howls as the GSE's regulator said it would cost an additional $154 billion to prop them up...that's in addition to the $135 billion already spent.
7) The "entitlements issue." Even with austerity the name of the game, it's doubtful there's any willpower to address it. There has been vague noises about looking at the cost of the Medicare Part D Prescription Drug Program (the newest entitlement), but Wall Street is not expecting much.
Bookmark CNBC Data Pages:
Questions? Comments? firstname.lastname@example.org