Experts say deal crucial by early ’13

Market

more the market is saying, ‘Just give us something.’ ”

Sal Arnuk, a partner at Themis Trading, suggested that the sharp drop in stocks might have been an overreaction. The Dow was down as much as 189 points, and before the market opened, stock futures suggested a decline of 200 points or more.

“It’s not a surprise that they weren’t able to come to an agreement,” he said. I don’t think most of Wall Street anticipated that they would come to an agreement.”

Other markets registered their concern, but the reaction was not extreme. The yield on the benchmark 10-year U.S. Treasury note fell 0.04 percentage point to 1.76 percent.

The price of gold, which some investors buy when fear overtakes the market, climbed, but only by 0.9 percent. Gold rose $14.20 to $1,660.10 an ounce.

If the full “fiscal cliff” takes effect, economists say it could drag the United States into recession next year. The impact would be gradual, though, and a recession is not a sure thing.

Most people would receive only slightly less money in each paycheck. And the tax increases and spending cuts could be retroactively repealed if a deal comes together after Jan. 1.

If budget talks dragged on, many businesses might put off investment or hiring, and consumer spending could suffer. That’s why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.

“Believe you me,” Krosby said, “if you think that there is a recession in the offing you are going to see this market sell off. It’s sell off first, ask questions later.”

It was not the first time that Wall Street worried about the “fiscal cliff” talks.

On the day after the election, when voters returned divided government to power, the Dow dropped 312 points. On Nov. 14, when President Barack Obama insisted on higher tax rates for the wealthy, the Dow dropped 185 points.

The sharp drop in stocks Friday was reminiscent of, although much smaller in scale than, what happened Sept. 29, 2008, during the financial crisis. The House defeated a proposed $700 billion bailout of the U.S. financial industry, and the Dow plunged 777 points, its worst one-day decline. Four days later, the House, shaken by Wall Street’s reaction, passed a modified bill.

Stocks closed sharply lower Friday in Asia after House Republicans canceled their vote. The Nikkei index in Japan fell almost 1 percent, and Hong Kong’s Hang Seng Index dropped 0.7 percent. Stocks were also lower in Europe.