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'Cliff' deal sends stocks up, but problems lurk

Published:Thursday | January 3, 2013 | 12:00 AM

The 'fiscal-cliff' compromise, even with all its chaos, controversy and unresolved questions, was enough to send the stock market shooting higher on Wednesday, the first trading day of the New Year.

All the major United States (US) stock indexes swelled more than two per cent in early trading and were still up significantly in the afternoon. The Dow Jones industrial average briefly surged to its biggest gain in six months.

The reverie multiplied across the globe, with stocks throughout Europe and Asia leaping higher.

In the US, the rally was extraordinarily broad. For every stock that fell on the New York Stock Exchange, roughly nine rose. Technology and bank stocks rose the most. United States government bond prices fell as investors pulled money out of safe-harbour investments. Zipcar soared nearly 50 per cent after agreeing to be bought by Avis.


But for all the euphoria, many investors cautioned that it can't last long. The deal that politicians hammered out merely postpones the country's budget reckoning, they said, rather than averting it.

"Washington negotiations remind me of the Beach Boys song, 'We'll have fun, fun, fun 'til her daddy takes the T-Bird away'," Jack Ablin, chief investment officer of BMO Private Bank in Chicago, wrote in a note to clients.

"Nothing got solved," added T. Doug Dale, chief investment officer for Security Ballew Wealth Management in Jackson, Mississippi.

According to them and others, the markets were celebrating Wednesday not because investors love the budget deal that was cobbled together, but because they were 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 House 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.

- AP