In the first day of trading after the House passed the Senate bill resolving — at least temporarily — the so-called “fiscal cliff,” the Dow added 308.41 points on Wednesday, for a 2.35% gain.
Wall Street never seemed to take the threat of going over the “cliff” too seriously. In mid-November, respected market-watcher Ben White of Politico said “It’s already over.” He said the kabuki theatre would play out but a deal with rates rising on top earners was on the way. The Dow immediately rallied.
Throughout December the market veered up and down in the days after Speaker Boehner’s “Plan B” failed, but it never fell too far below the floor of 13,000.
Wall Street’s cool reaction to this debate starkly contrasts the nosedive it took during the breakdown of talks regarding the debt limit in the summer of 2011. Then the Dow lost six months of gains in just over a week of trading days.
The debt limit will be reached again sometime in March, just after the sequestration of automatic cuts to defense, Medicare and other crucial programs was rescheduled to go into effect as part of the “cliff” deal. The sequestration, the debt limit and a continuing resolution to fund the government for the next year are being called a series of new cliffs that promise even more contention than we saw in December.
The president promises that any deal to resolve the sequestration must include balance, with tax increases on those who can afford to pay. But with 99 percent of the Bush tax cuts now permanent, it isn’t clear where the new revenues would come from. The cuts that have been discussed — including “chained CPI,” which cuts the growth of Social Security benefits and raising the Medicare age — are extremely unpopular with Democrats. Defense cuts are equally disdained by the right.
Discretionary spending is near a 40-year low. The growth in government spending is almost entirely tied to the costs of a struggling economy and the flood of Baby Boomers retiring. Any cuts will be be painful and unpopular.
So as much as the markets liked the resolution of the “fiscal cliff,” which made the capital gains and estate tax cuts permanent, much rockier days appear to be ahead.
Photo credit: Matthew Knott via Flickr.com