Why the Dow Skyrocketed Today
I don't know about you, but I'd be perfectly content to never hear the words "fiscal" and "cliff" together again. Following a last-minute deal concluded before midnight yesterday, the House of Representatives approved a bipartisan bill to avert $600 billion in spending cuts and tax increases that would have otherwise taken effect today.
In response, investors and traders have sent the market soaring. With roughly an hour left in the trading session, the Dow Jones Industrial Average is higher by more than 216 points, or 1.7%. According to James Paulson, an analyst at Wells Capital Management, as quoted by Bloomberg News: "We sold off on the uncertainty of what it means to go over the fiscal cliff and that's been removed. We're revaluing the market based on what's closer to the underlying economy and most of the economic reports have been pretty good."
The terms of the deal
In terms of the individual taxpayer -- and speaking in very broad terms -- the principal impacts of the deal are twofold. First, as my colleague Dan Caplinger noted, the bill "doesn't restore the payroll tax cut that's been available since 2011." Consequently, "workers will see an extra 2% of their paychecks go toward Social Security taxes in 2013, with typical households seeing about a $1,000 jump in taxes over the course of the year."
Second, those earning more than $400,000 ($450,000 for joint returns) per year will see their top marginal tax rate increase to 39.6%, up from the 35% rate of the Bush-era tax cuts. In addition, earners who are lucky enough to fall into this same category will be taxed at 20% for dividends and long-term capital gains. Those earning less than the stated amounts will still pay 15%.
While there's no question that the deal is a relief -- click here to see a more comprehensive list of its impacts -- it's still just a step in the right direction. The most disappointing part is that it fails to address the federal debt ceiling, which has recently sent the Treasury Department scrabbling in search of a temporary solution.
Looking past the cliff
Beyond the fiscal cliff (yes, there are things that impact stocks besides this unfortunate cliche), one positive piece of news out today is that domestic manufacturing expanded in December. The Institute for Supply Management's U.S. factory index rose to 50.7 last month. (Anything above 50 suggests expansion.) This beat the November reading of 49.5 and outpaced economists' predictions of 50.5.
In terms of individual stocks, Hewlett-Packard , Caterpillar , and Bank of America are leading the Dow higher today, all up more than 2% in intraday trading. While HP was the worst-performing component on the blue-chip index last year, Bank of America was its best -- the latter casting some doubt on the so-called "Dogs of the Dow" strategy, at least thus far. Caterpillar, meanwhile, stands to benefit handsomely by a recovery in the housing market -- which, as fellow Fool Morgan Housel has observed, appears to be underway.
Also in the news today are shares of Zipcar , soaring by nearly 50% after the company said it will be acquired by competitor Avis Budget Group . The move follows a similar deal between Hertz Global Holdings and Dollar Thrifty Automotive Group, in which the former agreed to acquire the latter. "We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company," said Avis Chairman and CEO Ronald Nelson. To read more about this deal, check out Brian Pacampara's take on it, in which he concludes that "while Zipcar shares might be all popped out, Avis and its newly bolstered growth potential might be worth looking into."
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The article Why the Dow Skyrocketed Today originally appeared on Fool.com.
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Hertz Global Holdings, and Zipcar. Motley Fool newsletter services recommend Zipcar. 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.
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