Stocks Rally on Fiscal Cliff Deal: What’s Next?


One day into the new trading year and we're off to a fantastic start. A giant market rally is underway, fueled by a hollow hope that has gleefully back-filled the void left by the agonizing conclusion of the fiscal cliff negotiations. Investors clearly know that all is not well, and yet they are more than happy to partake in the celebration, however fleeting the fiscal patch may be.

It's as if Wayne's World has come to Wall Street and the blanket answer to virtually any quandary is the same: "Party On, Garth. Party On, Wayne."

For veteran market watcher Sam Stovall, chief equity strategist at S&P Capital IQ, the opening-day pop is fine — to a point.

"I think investors are saying, 'I can at least push this market up to recovery highs, but I still want to wait and see what actually transpires before I push it to all-time highs,'" Stovall says in the attached video.

His thoughts are echoed by Raymond James' chief investment strategist Jeff Saut, who sent a note to clients today urging them to "never confuse motion with action."

The post-deal legislative window offers less than 60 days of visibility before the next round of budgetary battles (rumored to be even more vicious) kicks in, but don't let that get in the way of a good party. In the short term, Stovall says he is watching for at least two things that could carry the markets and investor confidence to the next level. Namely, a spate of seasonal buying patterns that have historically proven to be a positive time to own stocks, as well as the upcoming earnings seasons, which gets underway next Tuesday when Alcoa (AA) reports its fourth quarter results after the close of trading.

"Earnings growth estimates [for the S&P 500] have fallen from the mid-teens to 3.5%," Stovall's research shows, meaning the perennial pattern of lowering the bar, so to speak, to a point where it can be easily cleared has once again been achieved. Add in the fact that, on a fundamental basis, stocks are trading at a 23% discount to projected and trailing earnings, and Stovall begins to build his case for why he can see this aging bull market grinding higher for another year, lead by cyclical stocks and sectors such as Consumer Discretionary, Industrials, Tech and Financials.

I hope he's right, but in the meantime Wall Street's standing ovation for Washington's dysfunctional performance has left me slightly underwhelmed. Or as Garth used to say, "I think I'm gonna hurl."

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