As investors gear up for the end-of-year Santa rally, political uncertainty lingers in the backdrop, threatening to dampen holiday spirit if politicians fail to reach a deal to avert a government shutdown. And even as pundits play down the possibility of government coming to a screeching halt, the threat may keep some jittery investors sidelined.
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House Republicans unveiled a short-term spending bill this week to keep the government running through Jan. 19. The proposal includes controversial offsets that Democrats have already rejected.
Washiangton, D.C., strategists expect some sort of a deal to be hammered out.
"In the end, both parties figure out that they lose with a shutdown," said Tom Block, Washington policy strategy analyst at Fundstrat Global Advisors. "I think the overwhelming likelihood is that there is one more punt until middle of January and then there will be more jawboning and real brinkmanship for the final budget bill."
However, if politicians fail to compromise, the stock market could experience temporary selling pressure. Data from LPL Financial show that stocks fell an average of 0.6% during closures.
Meanwhile, appetite for stocks remains robust with equities seeing an inflow of $8.7 billion, helping main indexes test new highs, according to Bank of America Merrill Lynch.
The bank's Bull & Bear indicator fell to 6.2, the lowest since February 2017, which according to Michael Hartnett, chief investment strategist at Bank of America, suggests that investors will likely buy into the market on any dips.
Frank Cappelleri, technical strategist at Instinet LLC, projected stocks to track higher going into the last days of year, given their recent moves.
"With the strong snapback recently, the S&P 500 will begin next week at a new all time high," he said. "In 2017, breakouts to new highs like this frequently have seen upside follow through, which paints a positive picture for the final two weeks of the year."
December is among the best months for equities and stocks tend to outperform toward the end of the year.
Market sentiment will likely be buoyant following the release of the final version of a tax bill that is expected to be voted on next week. The plan cuts the corporate tax rate to 21% from 35% and lowers the rate for most households. Wall Street believes tax reform will be the key catalyst to drive stocks higher going forward.
"We expected significant upside risk for equities on a successful legislative outcome on U.S. tax reform. We estimate that the passage of GOP tax bill could add around $10/share in [S&P 500] EPS with an additional around $4/share in cash flow during the initial twelve months of full tax reform implementation," said Dubravko Lakos-Bujas, U.S. head of equity strategy at J.P. Morgan, in a report.
Politics aside, investors will be monitoring a new batch of data for a pulse on the economy. On tap are NAHB home builders' index on Monday, existing-home sales on Wednesday, weekly jobless claims on Thursday and consumer sentiment on Friday. Economic data have been generally positive, prompting the Federal Reserve this week to raise the gross domestic product growth forecast for 2018 to 2.5% versus 2.1%.
All main stock indexes finished at records on Friday with the S&P 500 and the Dow Jones Industrial Average gaining for a fourth week in a row.