If you overlaid Tuesday's stock-market action upon the most recent deficit talks in Washington, you would get some pretty radical conclusions that all revolve around an imminent deal.
First, you would say Medicare will be left alone. That's because the easiest way to save on these costs is to negotiate at arms-length with the drug companies over pricing, and the strongest stocks in the healthcare segment are the big pharmaceutical players -- in addition to Gilead (GILD) and Celgene (CELG), which do have big government pay exposure. Those big pharma players had been stalling out of late, perhaps over fears of a tougher Medicare posture.
Second, you would say there is some sort of a research-and-development or investment-tax credit coming, because tech and industrial machinery stocks did quite well, and they look ready to go much further. Will there really be new infrastructure spend? The stocks say there will be.
You could be inclined to think military cuts just won't happen -- because the defense stocks, while not strong, did consolidated the gains they've made in recent days.
Finally, you would think the mortgage-tax deduction is history. After all, the housing stocks performed sloppily, and we saw underperformance in the housing-related plays -- such stocks as Whirlpool (WHR) and Williams-Sonoma (WSM).
At all times, though, you would have to be convinced that the stocks are saying a deal is coming, and that this will happen before the U.S. goes over the fiscal cliff.
Now, from where is this talk emanating? Is it from optimism originating in leaks from the White House? Is it from some sort of mythical polling data? Is it from a false sense of surety that, regardless of what House Speaker John Boehner comes up with, it can be sold to rebelling anti-tax pledge members?
Is it from the brand-new movement by business leaders to embrace tax increases for the rich, as chronicled in The New York Times? Does that directly undercut the desire of the Republicans to directly protect these people from tax increases?
It's rather odd to see rich people -- those hitherto wedded to a desire for no higher taxes -- going to Washington to say they will take tax hikes, even as the no-tax pledgers in Congress are still arguing against it. Who the heck are these congressmen representing then if not the very people who are now amenable to increases? Is it the silent minority of the 2%? Is it worth going over the cliff and into a recession over that the group? To use the parlance of Grover Norquist -- the power behind the Republican throne, Mr. No-Increase-In -Taxes -- are these rich people having impure thoughts about their own wealth?
Wherever this deal-talk optimism has come from, it is so palpable that it calls into question every public utterance, whether it's comments from the very reasonable Bob Corker, the Republican senator from Tennessee, or fellow Republican and hardliner Ron Johnson of Wisconsin. Corker seems to have backslid from his "everything's on the table" remarks this weekend, while Johnson has an "over my dead body" approach to new taxes.
Maybe every bit of what we are hearing from the Republicans is posturing. Maybe enough are caving to make a grand bargain possible, reachable, palpable.
Or maybe it had nothing to do with Washington at all. Maybe there's simply a belief that things are getting better worldwide, given a five-year high in the German Dax and rumblings of more improvements out of China. Perhaps, in light of all this, folks believe all that matters is that the rest of the world is better. On my Mad Money show Tuesday, I heard something like that from Saks (SKS) CEO Steve Sadove: He was very sanguine about sales considering Hurricane Sandy and the "cliff," the twin bugaboos of retail spending.
Maybe it's just an understanding that there will be a budget deal of sorts that puts an end to the wrangling, and maybe even protracted debt-ceiling negotiations, and that we are all just used to the chaos in Washington right now and we know it will sort itself out in the end.
But, whatever it is, Tuesday's market action gave us a buoyant picture. It's something we can build on, too, if the Federal Reserve statement this afternoon says, "Things are better but not so good that we can take our foot off the gas, and we are hopeful of a meaningful budget resolution."
It's a lot of wishful thinking, but the stock market says to embrace it now, because good things are going to happen in the Capitol, regardless of whether you believe it's possible.