Stock Market: Watch for a Storm this November and December

Two major public policy storms are brewing, and poised to collide in November, making the last two months of 2010 treacherous for investors.

First, pressure is mounting on lawmakers to extend the Bush tax cuts pronto, before the IRS issues guidance and employers lock the payroll systems into withholding a bigger chunks of workers paychecks at the beginning of the year on the assumption that the cuts will expire.1  Sentiment that extending the tax cuts is inevitable has likely been a big factor in the market’s recent push back over 11,000.

Second, as I’ve written, conservatives are poised to use newly won congressional seats to chip away at the federal government’s funding of long-term unemployment benefits that currently expire on November 30.

To boot, now there’s reason to think that the power shift intensifying these debates will begin sooner rather than later.  A recent Wall Street Journal article perceptively points out that up to three seats in the Senate could change hands in November because they are for offices currently filled by senators specially appointed to fill a vacancy, as opposed to the usual January start date.2

These debates can be expected to place countervailing pressures on stocks.  Extending the tax cuts will likely help buoy equity prices, while cutting the long-term unemployment benefits will raise fears of neutralizing a delicate recovery.

While many investors may be banking on exhilaration after the election following Republican and Tea-Party victories, what these forces mean for investors is turbulence.  My own sentiment is that the downside rather than the upside may have the upper hand in the short-term if political winds shift markedly to the right.  Extending the tax cuts may already be priced in to equity levels, while the question of whether to extend unemployment benefits is largely being ignored for now by both sides since it’s not an issue that wins votes.

We’ll see.

  1. See http://www.businessweek.com/news/2010-09-17/paychecks-could-be-whacked-if-u-s-tax-vote-slips.html. []
  2. “Senate Power Could Shift This Year,” Wall Street Journal, Sept. 27, 2010, p. A4. []

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