Updated Information: The European and Asian markets have rallied at the news of a deal. It will be interesting to see how our market reacts now, and if it will follow my prediction. Is there a possibility of a massive rally, reflecting the international markets?
Updated Information: My prediction was wrong. Dow has already risen more than 200 points, NASDAQ has had a tremendous rally.
Yesterday, at 2:00 in the morning, the Senate voted in favor of a bill to temporarily resolve the Fiscal Cliff. The House of Representatives just voted in favor of this bill, and now it is on the President’s desk waiting for a signature. This bill will delay the automatic spending cuts and tax increases, which were set to kick in today, and is replacing it with a series of tax increases and spending cuts.
I was very disappointed in the deal for a multitude of reasons. The most disappointing thing about the Fiscal Cliff deal is that it is not inclusive of a compromise. The Republicans wanted spending cuts, and the Democrats wanted tax increases. President Obama has stressed that he supports a ratio 2.5:1, spending cuts to tax increases, yet the Fiscal Cliff deal’s ratio is 41:1. For every $1 dollar in spending cuts, we get an astonishing $41 dollars in tax increases. This was a partisan bill.
Another disappointing aspect of this deal is that it essentially was just like kicking a can down the road. Except the road ends somewhere. We will face Fiscal Cliff discussions again in February, as we will have a similar problem. We cannot continue down the road of debts and deficits; eventually, we will get to an unsustainable rate and our economy will crash. If we continue down this path of kicking the can down the road, it will eventually catch up with us.
The stock market will be interesting tomorrow. Will it go up because a deal was reached? Or will it go down because the deal reached has yet to have been signed into law, and the deal was so small? I predict that the market will have a drastic drop tomorrow, as part of the deal includes a 9% tax increase on capital gains. That capital gains tax increase will cause investors to pull, and if this tax increase was not implemented, they would still be pulling from the market based on the content of the deal alone.