Obama, GOP Crush Stocks on Path to Fiscal Cliff Showdown

(Updated to include comments from President Barack Obama.)

NEW YORK ( TheStreet -- Optimism returned after the market close on Friday that a meeting between President Obama and congressional Democratic and Republican leaders could lead to a renewal of negotiations to avert the "fiscal cliff," in spite of no new proposals offered by week-end.

With three days left to go until the New Year, it increasingly appears that Senate leaders may be able to broker a last minute deal, as Obama stands ready for a showdown with Republicans in Congress.

The president may either try to broker a new budget proposal between Senate Minority Leader Mitch McConnell (R., Ky.) and Majority Leader Harry Reid (D., Nev.), or force an up-or-down vote on his existing budget plan, unveiled a week ago.

At 3 p.m. Eastern time, Obama met with Republicans McConnell and Boehner and with Senate Majority Leader Harry Reid (D., Nev.) and House Minority Leader Nancy Pelosi (D., Ca). U.S. Treasury Secretary Timothy Geithner was seen attending the meeting along with Sen. John Kerry (D., Mass.), Obama's recently appointed secretary of state.

Markets fell sharply as the meeting convened and reports from CNBC and Bloomberg indicated Obama wouldn't offer any new proposals. However, in a White House address and in statements on the Senate floor, Obama, McConnell and Reid all offered signs that a last minute deal could be reached by Sunday evening.

"I just had a good and constructive discussion here at the White House... Senators Reid and McConnell are working on an agreement right now," said Obama in an address to the media that started at 5:45 p.m. ET.

While President Obama expressed optimism a deal on lower income and middle class tax cuts could be reached, which would also extend unemployment insurance set to expire in the New Year. He also showed a willingness to put a previous budget proposal to the Senate for an up or down vote, which the president said could pass.

On the Senate floor just after 5:15 p.m. ET, Reid indicated there was still time for a last-minute vote at 2 p.m. ET Sunday. "I think it was a very positive meeting," he said.

"We are engaged in discussions," said McConnell of the prospect that the Senate finds a bipartisan proposal that could face a Sunday afternoon Senate vote, which would subsequently move to the House. "I am hopeful and optimistic," he said.

Fiscal cliff talks in Washington turned optimistic just after 5 p.m. ET; however, it didn't filter to Wall Street, where trading closed at session lows on Friday, in the absence of new budget proposals offered at the White House meeting.

The Dow Jones Industrial Average declined 158 points, or 1.1%, closing below 13,000. Dow futures contracts have the index down by over 200 points.

The S&P 500 fell nearly 16 points, or 1.1%, and closed just above the 14,000 level. The Nasdaq dropped 25.6 points, or 0.9%, to 2,960.31.

Shares of all companies in the 30-member Dow fell, with Hewlett-Packard ( HPQ) declining the most, at 2.56%. Chevron ( CVX) and Exxon Mobil ( XOM) were the only other Dow stocks to drop more about 2%. American Express ( AXP), the only rising stock in midday trading, was down slightly by Friday's close.

Lawmakers weren't the only people to change their script on the looming fiscal cliff.

After downgrading the U.S. government's debt rating amid the messy August 2011 debt-limit negotiations, ratings agency Standard & Poor's said on Friday it doesn't expect a fiscal-cliff stalemate to affect its rating of the government's debt. Meanwhile, the prospect of a standoff between Obama and congressional Republicans doesn't appear to raise S&P's alarm that a last-minute deal could contain short-term measures that don't resolve long-term budget issues.

"Standard & Poor's Ratings Services does not expect negotiations over the fiscal cliff to have an impact on its 'AA+/A-1+' ratings on the U.S. federal government," the rating agency said in a press release late Friday.

Still, an 11th-hour agreement that waters down tax hikes or budget cuts would appear to reaffirm S&P's negative outlook on the government's debt rating.

"Our existing negative outlook on the U.S. rating speaks to the risk of a deliberate further loosening of fiscal policy, for example through a material weakening of the Budget Control Act of 2011 without compensating measures," S&P said Friday.

Peter Tchir, head of TF Market Advisors, said he remains "stubbornly optimistic that the politicians do enough over the weekend for a bounce" in stocks.

Lawmakers have three days to broker a deal with lawmakers before taxes automatically rise and spending cuts take hold, a combination that could push the economy into a recession, according to Congressional Budget Office calculations.

On Thursday, fiscal-cliff negotiations also moved stocks sharply. Markets fell after Reid said Republicans are stalling in finding a solution. "I don't know time-wise how it can happen now," he said at the time.

The S&P 500 rallied late on Thursday after Rep. Eric Cantor (R., Va.) said on Twitter the House of Representatives will meet on Sunday, Dec. 30, as Congress works to broker a last-minute deal.

"The House may be in session through Wednesday, Jan. 2," he wrote in a follow-up post to the social network.

In a Senate chamber speech late on Thursday, McConnell said President Obama had spoken to the Senate's GOP leadership about the prospect of reviving talks. While McConnell expressed skepticism on the timing of Obama's outreach, he added, "We might finally start talking. ... Hopefully there is still time for a deal of some kind."

In a second Senate floor address Thursday, Reid replied to McConnell, saying he would be willing to act on a "reasonable" proposal offered by House or Senate Republicans.

Still, across the aisle, some Republicans maintained skepticism of a deal on Thursday. Sen. Bob Corker (R., Tenn.) said on Thursday that President Obama's meeting today with top GOP leaders was likely little more than window dressing.

"It's feeling very much like an optical meeting, not a substantive meeting," Corker said in a meeting with reporters Thursday.

The presence of Kerry and Geithner at Friday's meeting between President Obama, and Democratic and Republican congressional leadership underscore the wide-reaching impact of the fiscal cliff.

Geithner said on Wednesday he will do all he can to create a cushion for lawmakers. He said in a letter to Reid that the federal government will reach its $16.394 trillion statutory debt limit on Dec. 31.

Geithner said the Treasury is planning "extraordinary measures" to postpone defaulting on $200 billion in bond payments and create some "headroom" for Washington beyond New Year's Day.

If lawmakers don't reach a cliff agreement, the Congressional Budget Office estimates a mix of tax increases and spending cuts will reduce the government's budget deficit by roughly $500 billion a year, a move that could put the U.S. economy in recession next year and cause unemployment to surge to 9%.

For more on the fiscal cliff, see why a housing recovery could blunt a partisan standoff. Also see why bank stocks fell on Thursday.

-- Written by Antoine Gara in New York

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