‘Cliff’ deal sends stocks up, but problems lurk

AP Busi­ness Writer

NEW YORK — The “fis­cal cliff” com­pro­mise, for all its chaos, con­tro­versy and unre­solved ques­tions, was enough to send the stock mar­ket shoot­ing higher Wednes­day, the first trad­ing day of the new year.

All the major U.S. stock indexes swelled by at least 2 per­cent in early trad­ing before trim­ming some of those gains. The Dow Jones indus­trial aver­age briefly surged to its biggest gain in six months.

Stocks around the world also leapt higher. The major indexes in Britain, France and Ger­many rose more than 2 per­cent. Mar­kets in Greece and Spain were up more than 3 per­cent. Stocks in Asia also zoomed higher.

In the U.S., the rally was extra­or­di­nar­ily broad. For every stock that fell on the New York Stock Exchange, roughly 10 rose.

Some investors cau­tioned that the eupho­ria can’t last long.

The market’s big esca­la­tion, they said, was dri­ven not so much because investors love the bud­get deal that Repub­li­cans and Democ­rats ham­mered out, but because they’re grate­ful there was any deal at all.

“Most peo­ple think that no deal would have been worse than a bad deal,” said Mark Lehmann, pres­i­dent of JMP Secu­ri­ties in San Fran­cisco. He called the cur­rent pack­age “not too Draconian.”

The U.S. House of Rep­re­sen­ta­tives passed the bud­get bill late Tues­day night, a con­tentious exer­cise because many Repub­li­cans had wanted a deal that did more to cut gov­ern­ment spend­ing. The Sen­ate had already approved the bill, and it now needs the sig­na­ture of Pres­i­dent Barack Obama.

Because law­mak­ers didn’t have a bud­get com­pro­mise in place when the new year started on Tues­day, the U.S. tech­ni­cally did go over the “fis­cal cliff.” That means that cer­tain tax increases and gov­ern­ment spend­ing cuts auto­mat­i­cally kicked in that day, a sce­nario that some ana­lysts wor­ried would boot the U.S. back into recession.

The bill passed Tues­day night will pre­vent the “cliff” from tak­ing hold. Still, it only post­pones rather than solves many of the bud­get issues haunt­ing the U.S.

The deal doesn’t include any sig­nif­i­cant deficit-cutting agree­ment, mean­ing the coun­try still doesn’t have a long-term game plan for how to rein in spend­ing. Big cuts to defense and domes­tic pro­grams, which were slated to kick in with the new year, are still over­hang­ing the mar­ket but just delayed for two months. And the U.S. is still set to bump up against its bor­row­ing limit, or “debt ceil­ing,” in about two months.

“There’s def­i­nitely another drama com­ing down the road,” said Lehmann. “That’s the March cliff.”

Oth­ers worry that more polit­i­cal bick­er­ing could cause the U.S. to get its debt rat­ing down­graded by the rat­ings agen­cies. The stock mar­ket plunged in August 2011 after Stan­dard & Poor’s cut the U.S. government’s credit rating.

Wednesday’s per­for­mance gave no hint of the dark clouds on the horizon.

The Dow briefly surged as much as 273 points in early trad­ing. At noon, it was up 229 points, or 1.8 per­cent, to 13,333.

The Stan­dard & Poor’s 500 was up 25, or 1.8 per­cent, to 1,451. The Nas­daq com­pos­ite was up 70, or 2.3 per­cent, to 3,089.

The yield on the 10-year Trea­sury note rose sharply, to 1.84 per­cent from 1.75 per­cent, as investors dumped safe har­bor invest­ments like U.S. gov­ern­ment bonds and plowed money into stocks. Prices for oil and key met­als, includ­ing gold, cop­per and plat­inum, were up.

Still, some investors also noted that the “fis­cal cliff,” which has dom­i­nated head­lines for weeks, is only mask­ing seri­ous prob­lems punc­tu­at­ing the world econ­omy, includ­ing mid­dling growth for the U.S. econ­omy and the still-unsolved Euro­pean debt crisis.

There were new reminders of those issues Wednes­day: The gov­ern­ment reported that U.S. builders spent less on con­struc­tion projects in Novem­ber, the first decline in eight months. The pres­i­dent of debt-wracked Cyprus said he’d refuse to sell government-owned com­pa­nies, a pro­vi­sion that the country’s bailout deal says it must at least consider.

Among stocks mak­ing big moves, Zip­car shot up 48 per­cent, or $4, to $12.24 after the com­pany said it had agreed to sell itself to Avis. Avis rose $1.02 to $20.84, about 5 percent.

Zip­car has a busi­ness model that’s pop­u­lar with dri­vers, allow­ing them to rent cars for just a few hours at a time. The com­pany has strug­gled to win over investors, how­ever, and its stock plunged nearly 39 per­cent in 2012. Avis rose 84 per­cent in the same period.

Copy­right 2013 The Asso­ci­ated Press.

Posted by AP News on Jan 2 2013. You can follow any responses to this entry through the RSS Feed. Comments can be made below.