The first part of this month was spent worrying about the end of QE2.  That went well.

The second half of the first month of every quarter (right now) is called “the earnings season” when corporations announce their financial performance for the past quarter.  Remember breathlessly awaiting the earnings announcement of Alcoa or IBM, for example?  This is going well.  We’re actually seeing revenue growth as well as earnings growth, indicating growth from only cost-cutting may be ending.

However, unless there is some big surprise from Europe again, the U.S. stock market performance this week depends almost entirely on budget negotiations in Washington.  While I will never understand why some rocket scientist thought it was smart to link the debt ceiling to budget talks, it will be the driver of this week’s market.  If there is a “grand scheme” showing some ability of Washington to actually govern, the market will soar.  If failure to do anything becomes apparent, the market will slowly deflate, so that the actual default next month will be anti-climatic.

Maybe, I’m being “Pollyann-ish” but I don’t expect either scenario.  I expect some version of the Senate kick-the-can, deniability-buying solution to pass the House with some minor token changes to save face for both parties.  Much sound and fury signifying nothing.

For the year-end, I still expect the market to be higher than now.  While much uncertainty will remain, it always does, and businesses are already quite adroit with handling this. The dampening effects from Japan will be drying up.  The fears of a double-dip recession will be less.  The long, slow recovery will have had a little more time to repair.  And, we’ll be closer to the first quarter, which is historically the best performing quarter each year.