ETFs And Stocks Start 2013 With A Bang

Wednesday’s relief rally in stocks and ETFs was triggered by the last minute settlement of a portion of the fiscal cliff debate.

Tax increases were agreed upon, making permanent most of the “Bush tax cuts,” however, deficit reduction plans were pended for another two months as both sides lined up for what promises to be a hard fought battle.

Also just ahead lies the budget ceiling debate as the United States hit the currently authorized ceiling yesterday.

Questions now revolve around what impact all of this will have on GDP going forward. Many analysts suggest a reduction of 1-1.5% of GDP based on the current agreement with some as yet unknown further reduction after the spending cuts are agreed upon.

Regardless of the specific outcome, it’s clear that the fiscal cliff resolution will impact GDP to a significant extent, in that current GDP estimates are in the 1-3% range. Also, a number of analysts voiced concern that the agreement will adversely affect earnings and related stock and ETF prices.

For the day, the Dow Jones Industrial Average (DIA) jumped 2.35%, the S&P 500 (SPY) added 2.54%, the Nasdaq 100 (QQQ) gained 3.2% and the Russell 2000 (IWM) added 2.8%.

In economic reports, December ISM regained positive territory in its rise from 49.5 to 50.7 while construction spending fell 0.3% for November.

The week brings a slew of economic reports culminating in the unemployment and payrolls report on Friday. Other closely watched data will come regarding holiday retail sales which are forecast to be weak and will be announced on Thursday.

Bottom line: Yesterday was all about relief that the fiscal cliff was averted, although the reality is that only half of the debate was settled with the other half now morphing into a second fiscal cliff with a new deadline at the end of February. Further uncertainty for stocks and ETFs surrounds the deficit ceiling debate and how that unfolds when the new Congress begins tomorrow. On a technical basis, yesterday’s rally stopped just short of the September-October highs in major U.S. indexes which form a “triple top” and a significant resistance level that must be broken for this rally to be both sustainable and meaningful.

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