Investors Should Be Careful About Stock Market

There was good news Friday, following a pow-wow between President Obama and leaders of the House and the Senate: All four of the legislators predicted that a budget agreement will be reached by year end, averting a plunge off the ''fiscal cliff." A week ago, we seemed to be tottering on the brink. A quickie law will be passed delaying the detonation of the Budget Control Act of 2011, which calls for steep spending cuts, beginning in January. This, plus a delay in automatic tax increases, would keep us from going over the cliff. Look for a detailed list of goals for revenue gains and spending cuts to be announced before Christmas -- with the actual butcher's bill passed early next year by the new Congress.

House Speaker John Boehner Friday said he would agree to higher revenue in return for significant spending cuts. The Senate minority leader, Republican Mitch McConnell, said the cuts must include entitlement reform that fits a changing America. Surprisingly, neither the House minority leader, Democrat Nancy Pelosi nor the Senate majority leader, Democrat Harry Reid, objected. "I feel very good," said Reid, adding that the group had laid the cornerstone for a deal. Pelosi, bless her soul, said she wants to send a soothing message to consumers and the markets. She said this could be done in the short term by reaching an agreement on budgetary goals and a hard deadline for achieving them, and with measures of success along the way to build investors' confidence.

Steve McBee of McBee Strategic Insight, a well-connected Washington lobbying firm, told me he expects a final deal of $2 trillion in deficit reduction over 10 years, enough to calm, if not thrill, the markets. The starting point will be a much more ambitious $4 trillion proposal, he vaticinates. Brace for plenty of market volatility during the negotiations, he warns.
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