It looks like Washington is regressing further into their partisan ways.  We are still convinced, despite all their “efforts”, that a bill will be passed to avoid the fiscal cliff.  However, the real question is whether they will get the deal done before year-end, or whether the circus will continue until the tax rates go up for everyone in early January, at which point they immediately pass a bill that would in effect “lower taxes” thereafter.  I think the market will settle into the latter scenario as the worst case, and we will avoid any large scale sell off as they finish their partisan political games.

In the meantime, the market should also get some support to buffer the emotional selling that may occur over this game being played on the fiscal cliff due to continued improvement in the U.S. macro-economic numbers.  We are seeing that, even in the middle of all the concern over the fiscal cliff negotiations, many key economic indicators continue to improve.  Some of the signs of economic progress this week included better than expected orders for U.S. durable goods, which increased 0.7 percent last month.  This followed a 1.1 percent gain in October that was larger than previously estimated.  Also, consumer spending rose in November as Americans pushed aside the threat of higher taxes next year, buying gifts for the holidays and making up for shopping lost to Superstorm Sandy.   Commerce Department figures showed today that purchases increased 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated.  Finally, demand for goods such as machinery and electronics climbed more than forecast in November.  This is a good sign that U.S. companies are planning to expand next year, despite the fiscal cliff worries that many businesses cited for not expanding this year.  The economy is actually looking better than expected heading into 2013 and the only thing we need to keep this going is for Washington to do their job and then get out of the spotlight.

As a reminder, the U.S. markets will close early (at 12 Noon) on Monday, December 24, in preparation for the holiday.  The markets will be closed on December 25.  The Paradigm office will be closed on December 25 and December 26.

Merry Christmas, Happy Holidays, & Happy New Year!