With the House of Representatives approval of a fiscal agreement late Tuesday, investors were expecting a rally in the markets to start the New Year. But the surge was not expected to last long, with investors and economists quickly shifting their focus to several hurdles the economy faces in the coming months.
“We could see an early lift in the markets because of relief the deal went through,” said Gary Thayer, the chief macro strategist at Wells Fargo Advisors. “The response may be muted because the deal left out many long-term issues.”
Market strategists were forecasting that even the deal approved by the Senate early Tuesday and by the House late Tuesday night would reduce economic growth by as much as 1% in the first quarter of 2013. Much of this would come from a rise in payroll taxes on incomes under $113,700 that would affect about 77% of American households.
Then there are the fiscal disagreements that Congress did not try to address in its negotiations this week. Spending cuts of $110 billion were delayed for two months, and politicians have not come up with a long-term solution that would allow the government to get past the borrowing limits reached at the end of the year — known as the debt ceiling.
“We keep stumbling from patchwork solution to patchwork solution, without getting us to the longer term solutions we need,” said Michael Gapen, the head of economic research for the US at Barclays.
Technically, the country went over the so-called fiscal cliff on Tuesday, when markets were closed for the holiday. But the compromise reached later on Tuesday should retroactively cancel the tax increases that began. “If Congress just comes close to their most modest expectations, investors tend to cheer that,” said Ed Yardeni, the founder of Yardeni Research. “A lot of investors are suffering from battered investor syndrome.”
The New York Times