Why the Dow's Overreacting to the Fiscal-Cliff Deal


It's a full-on rally for the Dow Jones Industrial Average today, and it seems nothing can keep the markets from celebrating the passage of a bill to temporarily avoid the fiscal cliff. And what of the consequences of the deal? Wall Street will deal with them later: As of 2 p.m. EST the Dow is up 225 points, or 1.7%, and has remained solidly above the 13,300 mark for almost the entire day. It's one heck of a bullish day to start the year for investors, with every Dow member in the green and several stocks hitting gains of more than 2%. But looking ahead, exclaiming "mission accomplished" regarding the fiscal-cliff deal could be shortsighted.

The fiscal cliff is done for? Not quite.
Wall Street is cheering for the deal struck by Congress, but the victory will be short-lived. Tax hikes -- an issue talked about endlessly in the fiscal-cliff drama of late 2012 -- will still come into effect, including the payroll tax expiration. In total, the nonpartisan Tax Policy Center estimates that 77% of Americans will see a tax hike.

And sequestration? That hasn't gone away, either; it's just been kicked down the can a few months. While the feared across-the-board cuts have been temporarily staved off, the sequester will be back in the spotlight a little later in 2013 -- and with it could come another round of partisan clashing over the federal debt limit. America might get a breather from Washington's drama for now, but this is yet an ongoing political battle.

As has become typical in the fiscal-cliff campaign, Wall Street is looking right at the here and now, focusing its attention on the temporary avoidance of budget cuts. Industrial stocks, which were poised to be hammered by any negative impact of sequestration, have pulled in significant gains today. Caterpillar and Alcoa have risen 4% and 2.8%, respectively.

Fellow manufacturer Boeing has had an especially good day. Not only does it have fiscal-cliff momentum behind it, but the aerospace manufacturer also recorded a $6 billion order for its 737 MAX aircraft, pushing the plane's total lifetime sales past 1,000. Boeing's stock is up 1.8% so far.

Today's leader isn't any of the fiscal cliff-centered stocks, however; it's topsy-turvy Hewlett-Packard , which has started off 2013 with gains of 4.7% after the stock lost more than 45% last year. The company, which is still struggling with the Department of Justice's probe of its Autonomy deal and ensuing fraud accusations, said it may divest underperforming business segments in the future. For a company floundering in the declining PC business, that sure sounds like progress.

Among other top leaders of the day, Bank of America has seen shares gain 3.2%, while Intel has picked up gains of 2.7%.

The markets are up big-time today, but you could make even more outsized gains over the long term. In fact, The Motley Fool wants to give you a 98.79% chance at beating the market. If you're interested in the best odds in the universe -- including more than a 70% chance at doubling the market's return over the long haul -- here's some very good news for you: Motley Fool Supernova is reopening to new members for the first time ever on Jan. 15! Get instant and free access to learn how you can get these kinds of market-beating odds by clicking here now.

The article Why the Dow's Overreacting to the Fiscal-Cliff Deal originally appeared on Fool.com.

Dan Carroll has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Intel. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.