Holiday shopping could be a bright spot for the stock market, but both could soon stall if lawmakers don't make progress on the "fiscal cliff" when they return in the coming week.
Congressional leaders and President Barack Obama have said they expect compromise when making a deal to stop the $500 billion wave of higher taxes and automatic spending cuts from hitting the economy early next year.
But many on Wall Street are betting Congress will resort to its fractious ways before a deal is reached, and that could upset the stock market — and holiday shoppers, particularly those at the high end.
"This is part of the thesis for some of us who are talking about a fourth-quarter slowdown," said Daniel Greenhaus, global market strategist at BTIG. "Part of that thesis is consumers are on the verge of seeing their taxes adjusted in January. Is it going to affect their behavior? As you get closer to Christmas, and spending accelerates, how much of that spending will be curbed?"
There is a batch of consumer-related data in the coming week, most of it housing data, with home prices on Tuesday, new-home sales Wednesday and pending home sales on Thursday.
As housing has improved, so have consumer attitudes, but the impact of Super Storm Sandy could make data look temporarily weaker. Consumer confidence and durable goods are reported on Tuesday.
"It's going to be all fiscal cliff. There's going to be a lot of housing data, but there will be leaks and unconfirmed quotes, and how the conversations are going will matter," said Greenhaus.
Black Friday, and in fact, late Thanksgiving Thursday, was the start of the Christmas holiday shopping season, and early reports were strong.
Wal-Mart said it had its best Black Friday events ever this year, starting at 8 p.m. ET Thursday. Between 8 p.m. and midnight Thursday, it said its stores rang 10 million register transactions and nearly 5,000 items per second. (Read More: Less Stress—More Bags—This Black Friday)
Stocks rallied Friday, the first positive Black Friday since 2008.
The Dow jumped 172 points, and was 3.4 percent higher for the week at 13,009, its highest close since election day. The S&P 500 jumped 3.6 percent for the week, to 1409, and the Nasdaq was up nearly 4 percent at 2966.
Consumer discretionary stocks were up 4.4 percent for the week, one of the best performers, and the sector was the best performer since the start of November, up 2.3 percent against declines in most other sectors. Chain stores will provide a look at the holiday sales in their November sales reports, expected to be released Thursday.
Dana Telsey, CEO and chief research officer at Telsey Advisory Group, said she expects holiday sales to be up 3.5 to 4 percent this year.
"If you have to say will it be better or worse than expected, it will be better," she said, adding there are more "must have" gifts at higher price points this year.
While Black Friday shopping is important, she said the real make-or-break period is the last 10 days before Christmas, which accounts for 40 percent of sales. The key day, then, is the second to last Saturday before Christmas.
The timing of that is just about when Congress should be in the throes of fiscal cliff talks, and it could be a dramatic time. Telsey said the way the talks are covered in the media could have an influence on shoppers.
"There's much more effect on the high end," she said.
Taxes are going to go higher for the wealthy, no matter what kind of deal is reached.
There is an automatic 3.8 percent tax, resulting from the Affordable Care Act, on investment income for those couples earning $250,000 or more, and another 0.9 percent tax on each dollar earned above that threshold. The 2 percent payroll tax holiday is expected to expire for all tax brackets.
"Everybody's paycheck goes down 2 percent next year," said Greenhaus. "That really hits home."
What's not clear is whether the top tax rates will be raised, as sought by Democrats, or whether other revenue sources will be found, such as reduced deductions, a path suggested by some Republicans. (Read More: On the Table: Raising Taxes Without Raising Rates)
The expected increase in capital gains and dividend taxes are still unknowns, but they have already hit some stocks. The dividend-paying utilities sector was the only negative major S&P sector this past week, down close to 1 percent, and it's the worst performer since the beginning of November, down more than 8 percent.
Analysts are split on whether the market will be able to keep rallying, and they say whether there will be a "Santa Rally" this year depends on Congress. (Read More: Is Wall Street on Santa's List This Year?)
Greenhaus said the uncertainty makes it impossible to predict the outcome, and therefore stock reaction. "You just don't know what form and what shape this takes," he said. "If it drags on as I expect it to, another five percent on the downside is a fair assumption."
What to Watch
10:30 am - Dallas Fed survey
8:30 am - Durable goods
08:30 am - Fed Chairman Ben Bernanke welcoming remarks at National College Fed Challenge Finals
9:00 am - S&P/Case Shiller
10:00 am - Consumer confidence
10:00 am - FHFA home price index
10:00 am - Richmond Fed survey
1:00 pm - $35 billion 2-year note auction
10:00 am - New-home sales
12:15 pm - Fed Gov. Daniel Tarullo at Yale School of Management
1:00 pm - $35 billion 5-year note auction
2:00 pm - Beige book
Chain Stores' November sales
8:30 am - Initial claims
8:30 am - Real GDP (Q3)
10:00 am - Pending home sales
11:00 am - Kansas City Fed survey
1:00 pm - $29 billion 7-year note auction
8:30 - am Personal income
9:45 - am Chicago PMI
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