Yesterday the Dow Jones Average rose over 300 points, allegedly on news of the tax increases Congress passed. Market reactions to world events are often swift and dramatic. A 300 point rise is a pretty strong response.
The market has often been likened to a herd of wild animals. As we known, herds are prone to stampedes. That means their herd behavior is not rationale even though their movement may have begun with a authentic warning signal. For investors 300 points in the positive direction is great news. We must remember, however, the Wall Street herd contains many wolves in sheep’s clothing.
The wolves would gladly help the market rise way above any consensus value. Wolves delight in later selling the market short and reaping profits on the way down too, We all know that the market does not moves in straight lines. There are always ups and downs. But most people hold that over time, positive underlying factors will support a rise in the market, and the opposite is true too.
So what was the big deal about Tuesday’s tax agreement?
Most probably it was simply that there was any agreement at all. The market does not care what the agreements are (even though it would be happier with some more than others). The market can not process “no agreement”.
Set the rules, let the games begin. Tuesday’s agreement clarified some of the rules, mostly on the tax side. The agreement did almost nothing for the deficit and gave no hint at what type or level of spending cuts will follow. Again, when these are decided, the market will most likely rise again. The market has no heart, and no anticipation of the future. The market is all about today (meaning the immediate future).
The deficit can not be really fixed until there are fundamental reforms of health care and national (world) security. Medicare and Medicaid are driving our deficit increases and our Defense budget is right behind. It makes no sense to be paying twice as much for health care as other modern countries, and it makes even less sense that the US defense budget is about the same size as all other countries combined.
I think the herd has sensed that there will be no fundamental reforms any time soon. That makes life a lot easier to predict, it will be a lot like yesterday.
Deficits build debts, and debts sink ships. Hmmm.