Our prediction that the fiscal cliff would be resolved has turned out to be partially right.
It is important not to get carried away with optimism because only one part of the three-part puzzle has been addressed. The three parts are: taxes, spending and the debt ceiling.
The fiscal-cliff deal only partially addresses taxes and totally kicks the can down the road on spending and debt ceiling. Republicans are on the record as ready to put up a stiff fight on spending and debt-ceiling issues. Democrats are on the record saying that they are still going to try to further raise taxes by closing loopholes.
All of these issues are supposed to be resolved in the next couple of months. Expect a more divisive debate ahead. As market participants realize the foregoing, the enthusiasm being seen this morning may wane. The fiscal cliff has only been superficially resolved, but the super cliff is still ahead.
Big institutional investors have been putting on risk (taking higher risk) in the wake of the last-minute fiscal-cliff deal. DJIA futures jumped 250 points before backing off. Notable strength has emerged in broad-based ETFs such as the SPDR S&P 500 ETF Trust, PowerShares QQQ Trust Series and SPDR Dow Jones Industrial Average ETF Trust. The largest stock by market cap, Apple has moved up to around $550. Strong rallies are in progress in Asia and Europe. Notable strength is being seen in a variety of emerging-market ETFs, as well as those for Germany, the UK, Italy and Spain….Read more at MarketWatch
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