Markets celebrate hope for deal even as deadline passes
BY DAVID ROEDER Business Reporter email@example.com December 31, 2012 7:16PM
CME Group welcome the New Year with showers of confetti at close of trading on floor of Chicago Board of Trade, Monday, December 31, 2012. I John H. White~Sun-Times
Updated: February 2, 2013 6:24AM
It’s amazing what even the hint of a fiscal cliff resolution can do.
Stocks soared Monday in a late-session rally after political leaders in Washington said they had an agreement on higher taxes on upper-income taxpayers, although spending cuts still had to be hashed out.
The nation still was heading over a fiscal cliff, however precipitous, but an agreement early in 2013 would be retroactive to Jan. 1. For the markets, that passed for good news after two weeks of mostly losing sessions.
The Dow Jones industrial average finished Monday up 166.03 points, 1.28 percent, at 13,104.14, regaining the psychologically important 13,000 level. Nearly all the gains came during the afternoon.
Paul Larson, chief equities strategist at Morningstar Inc., said it was a mild rally that captured relief over improved prospects for a budget compromise. He said market declines in recent days showed that investors were becoming pessimistic about the fiscal cliff.
“I think it’s a lesson that when you get everybody expecting that something will happen, it’s already being priced in to stocks,” Larson said.
The Standard & Poor’s 500 index rose 23.76 points, 1.69 percent, to 1,426.19 and the Nasdaq composite index jumped 59.20 points, 2 percent, to 3,019.51.
The day amounted to a celebratory close for 2012, which saw stocks post their fourth straight year of gains. The Dow was up 7.26 percent for the year, while the S&P 500 gained 13.41 percent and the Nasdaq rose 15.91 percent.
Investors’ opinions about the “fiscal cliff,” and how much it matters, are varied.
Some are unruffled: They’re confident that politicians will work out a last-minute deal, as they often do. Or they think that even if the U.S. does go over the “cliff,” it would be more akin to the anti-climactic Y2K scare than a true Armageddon. The “cliff’s” impact would be felt only gradually, they reason. For example, workers might get more taxes withheld from their first couple of paychecks in the new year, but it’s not as if they’d have to pay all their higher taxes up front on Tuesday. And Congress could always retroactively repeal those higher taxes.
Others are more concerned. The higher taxes and lower government spending could take more than $600 billion out of the U.S. economy and send it back into recession. Politically, the U.S. would send a message that its lawmakers can’t cooperate. And investors would have no good read on the country’s long-term policy for taxes and spending, or how the government plans to eventually trim its deficit.
The yield on the benchmark 10-year Treasury note rose to 1.76 percent from 1.70 percent late Friday, a sign that investors were moving money into stocks.