By all means, let's complete a deal today so we can go home. Let's raise taxes, let's stick it to those rich people, let's not cut spending, and let's pretend as if we've done something. The deal will do absolutely nothing to save this country. --Senator Rand Paul
Senator Paul may have some valid points, but this morning the market is just happy to have this painful fiscal cliff debate finished. House Republicans decided not to fight the lack of spending cuts and now it's a done deal.
According to the nonpartisan Tax Policy Center, more than 77% of U.S. households will pay more in taxes because of the expiration of 2% payroll tax cut but it is better than the alternative and stuff like that is irrelevant to the market right now. The big question for us to ponder is how far and for how long can the market run?
The fact that it's the first trading day of the new year adds some complexity to the issue. Typically, new money flows in as retirement fund contributions are made. We also have the end of tax-selling pressures. In addition, there is an inclination to put money to work because fund managers want to start off with good relative performance.
On the first day of trading in 2012, the market was up more than 1.5% and then ran straight up for three months. That extremely lopsided move was caused primarily by the Fed's quantitative easing program and it caused huge frustration for fund managers who were never able to catch up. Fund managers had a lousy year on a relative basis in 2012, which was mainly due to the fact that the market blasted higher out of the gate and never let them in.
While the bulls are celebrating the end of this fiscal cliff uncertainty and are happy to focus on individual stocks again, the bears continue to sound much like Senator Paul. They see the deal as doing nothing to solve our longer-term problems and anticipate that the debt ceiling fight will quickly cause pressure on the market again. As always, the bears have no shortage of economic arguments against this market but we have learned so often over the last few years stocks can perform well even when Washington and the economy are a mess.
Probably the biggest positive we have right now is that so many are poorly positioned for further upside. There is going to be a scramble to find long exposure and that always creates a supply of dip-buyers to provide support. The fact that it is the start of the new year just adds some fuel to the fire.
In hindsight, I sold down too much on Monday afternoon as I did not expect a clean deal to come this quickly. I'm going to be one of many who are looking for some new long exposure now. My hope is that with this political debate over, we can focus on individual stock picking. Since the main driving force for this rally is not the production of liquidity, I don't believe we are going to see the same sort of V-ish action we saw at the beginning of 2012. However, there is going to be chasing and dip-buyers may be frustrated as they look for entry points.
Jim Cramer has some comments about how this is the year that we seeing stock picking return. I sure hope he is right but there is going to be no shortage of macro issues and news headlines yanking the market around again. If stock picking mattered, we might actually see a return of individual investors. Nothing would be better for this market than that.
I'll likely do some selling into this gap up, but I'm looking for any early dips this morning to be bought and will be trying to put some money to work once the action settles down.
Good luck and go get 'em.