Holiday shopping is being held out as a potential bright spot for markets, discouraged by failure in Washington and fumbling in Europe.
The day after Thanksgiving is the official launch of holiday shopping season, and this year it starts a bit earlier — with a number of major retailers touting early shopping on the Thanksgiving Day holiday.
The overall expectations are for single digit gains this holiday season, but retail sales outpaced expectations last month so there is hope that maybe Santa may indeed come for retailers. Some see that gift giving spilling into the stock market, while others see Europe's unresolved debt problems scaring Santa and the consumer, if the impact on the stock market gets much greater.
"All indications are we're not going to have terrible Black Friday shopping just because everybody's afraid Congress did not pass the deal that they thought was going to happen," said Marc Pado, market strategist at Cantor Fitzgerald, referring to the failure of the Congressional super committee to find any of the $1.2 trillion in deficit reductions it was tasked to find.
The focus now is on whether Congress can pass an extension of emergency unemployment assistance and temporary payroll tax cuts that expire on Dec. 31. J.P. Morgan economist Michael Feroli said the failure to extend unemployment benefits would amount to a reduction of 0.2 to 0.3 percent on 2012 GDP. The payroll tax would be about a half percent hit, if not extended. Both would dent consumer spending.
As for holiday shopping, Feroli gives a mixed picture. "I think it sounds like November auto sales may even pick up. Early word is it doesn't feel like things are falling off a cliff, by any means. But when you look at fundamentals, the only thing right now you have going for you is lower gasoline prices," he said. "So there are some positives. Negatives are equity prices haven't been doing great. Labor income hasn't been doing great and sentiment probably hasn't been helped by any of the stuff that's going on in Washington."
Pado believes a good holiday shopping season could make a difference and act as a positive catalyst for stocks. "I think expectations are so low, it's a bar we can easily step over," he said.
"Stay focused on January. I think the direction is we're moving higher in a Santa Claus rally through January... the best three months of the year are November, December, and January, and we just came into November with an explosive October, and we've given half of it back," he said. Pado said by historical measures the stock market is undervalued — trading at 11.9 times projected S&P earnings of $99 to $100 for trailing 12 months earnings.
Europe, however, continues to serve as a problem for markets and could derail any rally that gets underway, he said. The euro, which ended the day at 1.3505, firmed slightly after the IMF announced it beefed up some lending vehicles to help protect some smaller countries from the euro zone debt crisis.
Stocks were again soggy Tuesday, with the Dow ending the day down 53, at 11,493 and the S&P 500 down 4 at 1,188. "The bears say we're going down to (S&P) 1,120 and testing that, and the bulls say we're going to work our way back to 1,250," said Pado.
What to Watch
The European Union's executive arm Wednesday is expected to release a series of proposals that call for more intrusive monitoring of member countries facing financing problems. According to reports, the commission study links proposals on the issuance of euro-zone bonds with recommendations that the commission should have more authority to intervene in national budgets and enforce fiscal discipline. Germany supports more stringent controls of budgets, but has been outspoken against an European bonds.
In the U.S., investors are watching weekly jobless claims, durable goods, and personal income and spending at 8:30 a.m. EST. Consumer sentiment is released at 9:55 a.m. The Treasury auctions $29 billion in 7-year notes.
EIA reports weekly inventory data at 10:30 a.m. EST. API late Tuesday reported crude oil at 22 million barrels, after a surprise 5.6 million barrel drop in the week ended Nov. 18. Analysts had expected a 300,000 barrel rise in inventories. Crude ended the day at $98.01 per barrel, down 1.1 percent.
Follow Patti Domm on Twitter: