Fiscal Cliff Deal Sparks a Rally

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The market started 2013 in a risk on mood. Tuesday’s fiscal cliff deal sparked a rally that saw the averages close on their highs of the day. The S&P 500 closed 2.54% higher and the Dow closed 2.35% higher. The New Year’s Day agreement will not raise taxes on those making up to $400,000. Those making greater than $400,000 will have a tax rate of 39.6%. However the payroll tax will move higher going back to the 6.2% level from the current level of 4.2%. Many investors sold high dividend paying stocks at the end of 2012 as they feared that taxes on dividends and capital gains would soar. Tax increases on dividends and capital gains were less than expected and the dividend payers were bought aggressively today.

Cyclical stocks, high beta names regardless of industry, materials, machinery semiconductors and banks were market leaders today. Correlations were high today as all sectors saw gains. The VIX was dramatically lower today as it fell 18.5%. Investors chased beta today as the macroeconomic fiscal cliff issue fell by the wayside.

Financials saw strength across the board as all major industry groups in the sector traded higher. A continued steepening of the yield curve bodes well for financials. Life insurers, banks and brokers were the leasers in the sector.

Technology was strong as most as all industry groups in the sector traded higher. Semiconductors were especially strong as they traded better than 3% higher. Solar stocks traded higher as renewable tax credits made it into the fiscal cliff deal.

The industrial sector traded just ahead of the broader market. Capital equipment names were aggressively higher today. Several capital equipment names traded higher after data showed that rentals of equipment picked up for the second straight month after four months of declines.

Homebuilders/building products traded higher with the tape. Building products companies were helped when construction data was released and showed better than expected numbers in residential construction spending.

The Dow Jones Transportation index broke out above resistance levels and is up over 4% for the week. Airlines, rails, parcels and truckers all advanced in the strong tape.

Energy traded higher, but well behind the overall market. Crude traded higher by 1.25% and natural gas was off y over 5%.

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About Thomas J Smith CFA