In what must be the longest 11th hour in the history of time, legislators in Washington DC have finally put together a compromise deal that will avoid the largest tax increase in U.S. history and $110 billion in government spending cuts. Though the next chapter in this "epic" battle will occur when the debt ceiling debate begins in the coming days, weeks and months, for now the pre-markets are up on the news.
Not only that, but overseas markets have made notable gains upon hearing the fiscal cliff in the U.S. has been (temporarily) avoided. The Hang Seng in Hong Kong has gone up 2.9% to its highest level in a year and a half. Markets elsewhere in Asia also showed gains, and European markets increased over 2% on the news.
Still relatively fresh off his successful re-election bid 2 months ago, President Obama seemed content to play chicken with the fiscal cliff issue in Congress. He has now gotten a short-term victory with tax increases to Clinton-era levels and an increase in the inheritance tax for the wealthy, but the drama regarding entitlement reforms and the debt ceiling will remain with us. So while markets may finally be able to exhale in relief this week, the new year is far from putting these issues behind it.
We also will see fourth quarter earnings season emerge over the next couple weeks, but preliminary expectations are less than sunny. We've seen a 3.6 negative guidance ratio for the S&P 500 for Q4, more or less in-line with pre-Q3 guidance -- and Q3 was a tough quarter, no matter how you slice it.
Though Housing and Consumer Discretionary stocks may continue to see improvement, recent stalwarts like IT still appear to be flagging. Overall, 3% growth is expected by analysts for Q4 earnings -- and while that's a lot better than the 0.1% we saw in Q3, it's a far cry from the 9.9% expected just a few short months ago.
With the holiday season in the rear-view window, our markets may indeed rejoice short-term to ring in the new year. But obviously we will keep our eye on the ball going forward. After all, in the past 2 years, we'd seen markets ramp up big gains in the early months on the calendar upon abundant optimism, only to give many of those gains back in the later months as earnings results brought everyone back down to earth.
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