SARASOTA - Wall Street applauded the fiscal cliff deal. Moments after the Dow's opening bell Wednesday, it shot up by 200 points.
“(Congress) didn't achieve much,” said Bruce Bittles, Chief Investment Strategist at RobertW. Baird & Co. in Sarasota. “I think they calmed the markets.”
With the payroll tax break expiring, all workers will see smaller paychecks, and top earners will pay a higher tax rate too. The bigger issue congress Created the fiscal cliff to tackle – the burgeoning budget deficit – it did nothing about, instead putting off the tough decisions about automatic spending cuts for two more months.
“Most of the underlying issues that were being fought over with respect to the fiscal cliff were not resolved in that deal,” says Frank Alcock, a professor of political science at New College, “so we're going to be fighting over these things for the next couple of months.”
Current politics make it difficult for Republicans to accept the higher tax rates, and Democrats to the swallow benefit cuts needed to cut our debt, Alcock says. “Washington is more polarized that most folks remember it being.”
But settling the tax rates, means that this stopgap does mark one accomplishment for Congress, and some certainty for the economy.
“The reason that's important,” says Bittles, “is because a lot of those folks are small business people, and households, and it allows them to think longer term, as opposed to giving someone a tax break that lasts six months.”
Critics point out that the deal adds rather than subtracts from the ballooning federal deficit. Bittles warns that debt drags down the economic recovery, despite all the measures meant to boost it. And the same markets that rallied on news of this deal, will lose their cheer if those in Washington can't strike a grander bargain.
“The greatest fear is that the markets will force it,” Bittles says. “The bond market will misbehave or the stock market will and it will force the politicians to make hard decisions.”
Traders enjoyed the day on Wall Street. The Dow finished up 308 points, its biggest one-day gain in more than a year, and the S&P 500 Index rose 2.5%. But fights in Washington – first over raising the federal debt ceiling, and then on the government spending cuts – loom ahead for Congress, and the economy.