Stocks Rise on Can-Kicking Optimism; Leap of Faith Justified?

Stocks are up across the board today in Europe and the US, allegedly on Fiscal Cliff Budget Optimism.

Stocks on Wall Street jumped on Monday on signs of progress in talks to resolve the scheduled tax increases and budget cuts in Washington.

The Standard & Poor’s 500-stock index leapt 1.7 percent in afternoon trading, while the Dow Jones industrial average jumped more than 170 points, or about 1.4 percent. The Nasdaq composite index added 1.8 percent.

Leading Democratic and Republican lawmakers expressed confidence on Sunday that they could reach a deal to avert mandated tax increases and spending cuts that would begin Jan. 1.

“A deal that doesn’t face health care spending head-on and also raises taxes of substance with economic growth mediocre is not a good deal,” cautioned Peter Boockvar, managing director at Miller Tabak & Company in New York. “This said, the markets will celebrate any deal in the short term but will likely deal with the economic consequences in 2013.”

UBS also introduced caution into the outlook. “We believe that the most difficult policy issues will be pushed into the future, constraining earnings growth and stock multiples,” said Jonathan Golub, strategist at UBS in New York.

Leap of Faith

It takes quite a "leap of faith" to presume it is 100% certain a deal can be worked out.

Moreover, the deal that was on the table last summer is no longer on the table. There will be tax hikes or there will not be a deal, unless president Obama completely backs down, and I strongly suggest he will not.

Should there be a deal, I am 100% certain it will be little more than a can-kicking exercise that solves no long-term issues, but it may give the market something to cheer about for the near-term.

The obvious "solution" (not that it really solves anything),  would be to let the fiscal cliff happen, then both parties could get together to lower taxes. This would save face with Republicans, but under this scenario there still would be some tax hikes (compared to now), and some revenue increases (compared to now), with the devil in the details of precisely how much is punted down the road.

Do not expect the rally to last long under any of these possible setups. The economy is at stall speed, and more QE will not accomplish anything.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com