There is one, abbreviated trading day left in 2012, and the question of the moment is what will happen tomorrow with the financial markets. The negotiations with the fiscal cliff have not gone well, so there is doubt now both for the immediate term (what will happen in the remainder of the lame duck session, which ends January 3) and for the short term (the two weeks or so following)--particularly, if there is no substantial agreement and the tax bite happens with initial 2013 paychecks to Americans. There will be a virulent public reaction if that happens, and the deal will get done.
Most of what I have to say about the fiscal cliff, what I think will happen, and what will happen, I have already said (or at least typed). The one new element, and it was a strong ingredient leading to the current form of stalemate, was a realization by the Republicans that letting the end of the year occur without agreement would allow them to achieve the necessary result of allowing wealthy individuals' taxes to rise without having to vote for it. This translated into a broad unwillingness for Republican Congressmen to back Speaker Boehner's disingenuous attempt at a show of strength (the so-called Plan B, raising taxes for just the wealthiest). The lame duck Congress could still get a shot at voting to reduce tax rates for the many without having to vote for an increase for anyone; it might not satisfy Grover Norquist, but would be eminently defensible before their party's voters. On the other hand, if there are no tough votes to be made, they could just as easily be made in the next Congress.
Anyway, we go into the last trading day of 2012 without an agreement (it's highly unlikely, but not impossible, that one could be sprung before 2 p.m. Eastern tomorrow). The markets have stopped believing so much in the eventual deal and started trading more on the absence of any current one; as a result the Dow Jones Index has dropped six of the last seven trading days--but so far, only about 3% since the 19th, to about 12,938.
The Markets on The Market
On intrade.com, struggling along though impeded by the website's decision to enforce more limitations on American participants (their positions have been closed out in recent days, though there are supposed to be new markets available to them), there are markets for the Dow ending at various levels: the key ones are over 13000, 12750, and 12500 (the odds outside that range are pretty much 100% or 0%, with the exception of the bet of a rebound over 13250, which has been purchased at a 5% chance by some contrarian). The 13000 bet has been a big loser for bullish bettors, dropping from 80% or so two weeks ago (well up from the 50-60% it ran for much of the year) to 20% by end of week, and now trading at about 10%. Of course, 13,000 would need only a slight increase (less than 0.5%) from the current level.
So, the consensus is for a drop, I'd say, but how big? The fact that there's only half a day of trading is not much of a limitation on the trading range, as the Dow could easily drop hundreds of points in minutes, or even at the very start of the day's trading. It just means there is less time in the trading day for some news, which would probably be positive, to affect trading. So, how much is the failure to agree priced in to current valuations? A drop to 12,750, about 1.5%, is a moderately-large one day change: the last trading is at 73.1% (as of 10:20 Central), but there is a huge gap between the bid value (in the 70's) and the asked value (97% or so), so this market has a very volatile future tomorrow, as those who may hold positions will seek to end them. A similar story holds for the market on the Dow finishing over 12,500--that would require a drop of some 3.5%, or as much as the total retreat of the last two weeks, but a bit of end-day panic could easily achieve it. The current quote on that one is at 99.7%, but that is misleading because the prior trades were in the low 90's. The highest bids are mid-90, and there are a lot more shares available at 99.7%--the seller has clearly cornered that market and is trying to take profits without risking a nervous Dec. 31.
Maybe more interesting than the short-term stock markets is what the bond markets think of the current madhouse. One piece of gossip I can offer is that Mohammed El-Erian, top dog at PIMCO, was taking a flight out of D.C. to L.A. yesterday--I saw him at Dulles Airport as I was waiting to catch a different flight. This would suggest no panic or news is expected, though of course time and distance mean less in today's society. If the bond market begins to lose confidence in the U.S., though, it will be a bigger threat to the economy than bad consumer confidence or a drop in the stock markets. That will not happen until mid-January, at the earliest, so there is still some time to avoid calamity.