Stocks and the Debt Deal

01/25/2013 11:02 am EST


Jim Jubak

Founder and Editor,

How excited will the global markets be about the debt deal? That's what Jim Jubak is trying to determine in order to get a better idea of how long the stock market rally will last.

For the week ahead, look to see how excited global financial markets get about the US deal to kick the debt ceiling extension debate down the road for three or four months, four months it looks like. The Republicans proposed basically a deal that would say, hey, we're going to ignore the debt ceiling until sometime in April and, at that point, we will simply raise the debt ceiling to whatever degree needs to be done to accommodate the debt that we have run up between now and then. It puts off all the hard decisions about spending cuts, tax increases, sequesters, a continuing resolution or a budget for keeping the government's doors open, all of that gets put off.

Basically, the rumor, the announcement of the deal, before the deal was even actually signed, European markets and some Asian markets started to get very excited because it was indeed putting off this crisis. I think there is some assumption that, well, if we put it off, that gives US politicians another three to four months to work out something and they will work out something. I don't know whether that last part is actually true. My guess is that we will wind up replaying this whole fingernail-biting crunch when we get closer to April again but, in the meantime, I think we're likely to get some kind of a positive bounce out of this.

I think the European market is likely to look at this and go, oh, okay, so, just as we have done with the euro, we have put this problem down the road so we can rally. One of the things that is very curious and a little worrying about this market is that we are already at five-year highs on many of the indexes. We're talking about lots and lots of stocks that are 52-week highs so, yes, indeed, I think this can keep this momentum going for a while, but we haven't had any correction here for quite some time. We are looking at a market that is really not necessarily severely overbought but certainly in the overbought end of this.

Kicking this problem down the road indeed does, I think, keep this going for a while and then leaves us very, very vulnerable to a disappointment when we get to April and worries set back in. April is a long way off from January. I think this gives us some more time to enjoy these highs, to push the market higher. It means the dollar will get, I think, stronger because we won't have to worry about this versus things like the yen so, you know, clear sailing for the market but let's just look and see exactly how clear the market thinks the sailing is. I think this means that the market does indeed continue to go up but the question is exactly how excited, how strong this rally will be on this news. 

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