Stocks Face Uncertain Future in Fiscal Cliff Battle

With 21 days to go before America zooms over the “fiscal cliff,” erasing the Bush tax cuts and slashing military spending, the one glowing question mark remains how the stock market will react.

“The truth is that we don’t know how the stock market will perform over the next three weeks–irrespective of how the talks go — nor can we even be certain they will decline in early January if we sail off the cliff,” says Allan S. Roth, founder of financial and investment firm Wealth Logic.

Indeed, the markets may jolt Washington into action as they did in September 2008 when congressional wrangling over a version of the bailout bill sparked a 777-point drop in the Dow–the largest ever one-day drop in history. Congress quickly cobbled together a revised bailout bill four days later.

Will President Barack Obama and Republicans calcified positions and stalemated negotiations prompt a frenetic stock sell-off? No one knows for sure.

“Nobody can predict the markets’ reaction,” said Rep. Jim Cooper, D-Tenn.

Rep. George Miller (D-CA) agrees: “Let’s not pretend the markets fully understand the politicians, or the politicians fully understand the markets,” said Mr. Miller, D-Calif.

Some stock analysts believe investors may have already factored in the inevitability of a forthcoming deal, thereby diminishing market reaction.

“The sentiment has definitely changed,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York. “The market has become somewhat desensitized to headlines out of Washington because the fear of the economy hitting a wall in 2013 if we don’t get a deal done has diminished.”

On Monday, stocks ended trading on a relatively calm note, with the Dow finishing 14.75 points up and the Nasdaq rising 8.92 points.