The U.S. economy temporarily averted disaster at a much-anticipated bipartisan agreement to avoid going over the "fiscal cliff." It seems everybody was expecting the announcement because "we just couldn't let it happen." The market rallied as a result. No surprise.
Several key facts remain:
1. The government has just prolonged the agony of reaching a solution to our budgetary problems. The new agreement gives us an emergency extension.
2. The deadline for extending the national debt ceiling falls near the same deadline for resuming budgetary talks. The national debt ceiling could face even a more bitter battle in Congress before compromise is reached.
3. The economy will simply be put on hold until a definite solution is negotiated. Most employers will not be committing any significant capital or increase in their labor force until they are sure what the effects of the new agreement will look like.
4. Although both political sides claim victory they both have problems of their own. The GOP is clearly in disarray and seems to have fallen out of favor with the average American. Most blue collar, or working class Americans see the GOP as the party for the "rich." Yet nobody can seem to say who these "rich" people really are. The Democrats also have their problems. The President likes to say he has the confidence and support of the American people but he clearly could not get the other side to agree to a compromise without a significant amount of effort.
5. The market is trying to break above the right shoulder of our "head-and-shoulders" bearish pattern. The coming weeks will show whether the momentum is really there. If a meaningful compromise is reached the market should resume its bullish run. However, the uncertainty that presently exists will keep it in check.
The polarization in Congress is likely a reflection of the split among the American people as a whole. When united, we can accomplish alot. When divided, we accomplish little. Both sides are to blame.
There continue to be opportunities to trade these daily swings but the overall picture will remain negative unless Congress and the President reach a meaningful solution.
