Markets Queazy as Last Trading Day of 2012 Becomes a Cliff Hanger

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Even if Congress cobbles together some type of "fiscal cliff" band-aid deal, it may only appease markets for a short time.

Stock futures were higher Sunday night but still pointed to a lower opening Monday,after Friday's steep decline.

Along weekend of budget talks between Senate leaders ended with no resolution,but the Senate returns Monday at 11 a.m. ET. The so-called "fiscal cliff" is the double slam the economy would feel from the $600 billion expiration of tax breaks and the onset of automatic spending cuts that will start hitting the defense department and other government agencies as of Jan. 1.

Monday promises to be a day of high anxiety as the Senate spends the final hours of the year trying to strike a deal on tax and spending elements of the so-called"cliff" that would also then have to be approved by the House.

Significant differences remain between Democrats and Republicans, and chances for a deal looked slim to analysts late Sunday. The Congressional Budget Office has warned the economy could fall into recession quickly, if Congress does not stop thewall of tax increases and budget cuts from hitting the economy.

Analysts have said it won't make much difference if the time frame for a deal stretches into early January, but much later becomes problematic. The question however is how do markets tolerate that, given the fact that the debt ceiling debate is also around the corner. The debt ceiling limit for U.S. borrowing was to have been reached Monday, but the Treasury said it would take steps to extend that by several months.

"It's year-end, and you will get some pension fund related flows," said Barry Knapp,head of U.S. equity portfolio strategy at Barclays. "I would guess the last couple of months, there's probably been slightly better buyers. I can't imagine why anyone would want to put money to work at this point."

Stocks wind down December with a loss, of nearly one percent for the S&P 500, but a solid gain for the year of 11.5 percent. The S&P lost 1.1 percent to 1402 Friday.

(Read More: Somewhere Over the 'Cliff'...Skies Are Blue)

"We're going to be down for December again. The question becomes where do you go in January? That's a very difficult question, and I find it hard to believe that market participants ignore the fiscal cliff debate which could persist for the entire month," said Daniel Greenhaus, chief global strategist at BTIG. "Even if they do ignore it, the un-ignorable reality is that February brings the debt ceiling debate."

Knapp said he expects a negative start to the year. He said investors will start to realize that the holiday shopping season was not as good as expected, and the December chain store sales reports are released this Thursday.

"Everybody was all bullish for the consumer. I thought it was just a matter of time. I think these Christmas sales that we've seen this far are consistent with the fact the consumer is not that strong. If it becomes clear we ended the quarter with weak economic momentum, and we have earnings season in a few weeks, it'shard to imagine the first move out of the gate would not be lower," he said.

(Read More: Here's What Pimco's Bill Gross Sees Going Higher in 2013)

Strategists said the bigger issue is that even if Congress agrees to stop reversal of the Bush tax cut for most tax payers, and the automatic spending cuts are stopped,the bigger issues of tax reform and entitlement cuts are still unresolved.

"All along it's the details, the cost to the economy, that's of the essence and we're not optimistic that whatever passes, assuming it does, is more than a stop gap on taxes for most people but leaving EVERYTHING else that constitutes the Cliff outstanding. Anyway, we are reading the news and if you're not you haven't missed much," wrote CRT Capital chief Treasury strategist David Ader in a note Sunday night.

Greenhaus said it appears the Senate found a way to speed a vote through Monday, but even so he expects the vote may be taken up in several days, by the new Congress Jan. 4. Some of the issues like the dividend tax, moving from 15 percent to 20 percent, and a patch for the AMT, which would have hit millions more taxpayers, appear to have been resolved, he said. Still outstanding was what income levels would be affected by expiring tax breaks.

President Barack Obama Friday said he had asked the Senate leadership to come up with a compromise bill that could pass both houses, but if they are unable, the House would vote up or down extending the Bush tax cuts for 98 percent of taxpayers.

(Read More: Obama: GOP's Focus on Rich Is Standing in Way of a Deal)

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