Maybe it's because investors are optimistic a deal will be reached. Or maybe it's because they're already expecting the worst.

This time around, though, Wall Street seems to be shrugging off next week's congressional deadline to break the political gridlock that sent financial markets into a tailspin last summer.


"I think the expectations just aren't that high given what we went through in August," said Wells Fargo senior economist Mark Vitner.

The congressional budget "supercommittee," which faces a Nov. 23 deadline to find $1.2 trillion in spending cuts and new tax revenues, was born out of the budget stalemate that sent the financial markets on a wild ride in August.

After transforming a routine debt ceiling increase into a self-imposed deadline, hard-line Republicans squared off against the White House, demanding deep spending cuts, forcing the Treasury to the edge of default As the bitter, partisan battle dragged on, the stock market plunged by 20 percent in a matter of weeks. Since then, stocks have recovered about half the lost ground.

Until this week, the supercommittee offered little in the way of progress reports, removing the partisan debate from cable news channels and newspaper op-ed pages. As the deadline approaches, there have been encouraging signs that a deal may be possible. On Tuesday, House Speaker John Boehner, R-Ohio, endorsed a proposal by the six GOP committee members that would involve raising taxes by $300 billion in exchange for lower tax rates.

"We haven't lost hope yet, but ... this week is crucial," Rep. Jeb Hensarling, R-Texas, a co-chairman of the deficit panel, said Tuesday.

Boehner and Senate President Harry Reid, D-Nev., met Tuesday, another sign the committee may be able to break the longstanding deadlock over taxes and spending cuts.

Some of the cuts are going to be relatively easy. By eliminating $1 trillion in spending, and the need to borrow that money, the committee can claim some $200 billion in savings on the interest that would no longer be owed on that debt. There also seems to be agreement to tweak the formula for future Social Security cost of living increases, which will bring further savings.

After that, the choices become tougher. Among the most contentious are a payroll tax cut and continuation of extended unemployment benefits; both of those programs expire at the end of the year. Economists say failure to renew those programs would dampen consumer spending and add drag on an already-weak economic recovery.

The worst-case scenario for Wall Street would be a "partial" deal that falls short of the $1.2 trillion target - or no deal at all. Failure by the supercommittee would likely lead to another round of partisan bickering and finger-points, reinforcing the lingering worry here and abroad that the U.S. government has lost control of tax and spending policies.

Failure to reach a deal would also trigger the so-called "sequester," forcing automatic cuts of $1.2 trillion, split evenly between defense spending and domestic programs. The purpose was to create a "doomsday" scenario that would give the supercommittee a big incentive to come up with a deal.

But Wall Street seems to have concluded that the sequester is not as scary as originally intended, according to Mark Pado, U.S. market strategist at Cantor Fitzgerald.

"The feeling is that it's 2013 before any of the cuts take place," he said. "So they'll just bide their time until after the elections. Neither side wants to see defense or Medicare cut that much."

That may be one reason why defense industry stocks, which are directly in the crosshairs of the automatic budget cuts, have held up relatively well. After plunging with the broader market, the group has rebounded nearly 20 percent from August lows.

As the deadline approaches, a new scenario is emerging that would have both sides agree to a broad compromise - in principal - but leave the heavy lifting of specific cuts to the tax and spending committees in the House and Senate.

"That's certainly not going to meet the spirit of what was intended when they came up with this process," said Vitner.

A broad handshake also may not go far enough to satisfy the two rating agencies, Moody's and Fitch, that continue to issue a top, Triple-A rating on Treasury debt but have put the government on a "negative review." Failure to reach a compromise in August prompted the third major credit rating agency, Standard & Poor's, to downgrade Treasury debt a notch for the first time, to Double-A.

If the supercommittee defers the hard choices, Moody's and Fitch might be more likely to follow Standard and Poors with a downgrade, essentially saying, "That's not good enough." Ironically, if committee ends in a stalemate and the automatic cuts kick in, that might be enough to satisfy the credit raters, according to Goldman Sachs economist Alec Phillips.

"Both ratings agencies have indicated that while a stalemate in the supercommitee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic budget cuts if not through the supercommittee," he wrote in a recent note to clients. "So their fiscal outlook should remain unchanged."

It is not clear how much impact another downgrade would have on financial markets. Stock and bond markets largely shrugged off the S&P downgrade after investors had a weekend to absorb the news, which came out late on a Friday. Even then, U.S. Treasury bonds were still seen as the "safest havens" for global investors worried about European debt problems.

But the downgrade has already had a longer-term impact, according to Vitner.

"We did see a reaction to the downgrade, but folks have been looking [in] the wrong place," he said. "When the economic environment becomes more uncertain people shy away from risk. That affects the economy in a number of ways. Banks, for example, will not lend to a risky enterprise that was borderline that before might have had a better chance of getting approved. So we have seen the impact."