House Speaker Boehner stepped to the podium yesterday right on cue and expressed a sense of optimism that a fiscal cliff deal can get done. Moments later, President Obama said the same, highlighting his hope that a deal can get done before Christmas.
In less than 24 hours, the market went from fearing and loathing Senate Majority Leader Reid's pessimistic view of things to feting and loving the sense of optimism shared by Messieurs Boehner and Obama.
The Dow rallied more than 200 points off its intraday low; the Nasdaq jumped more than 50 points from its worst level; and the S&P 500 surged nearly 25 points from its lowest point of the session.
The response was a bit silly, just as the reaction to Senator Reid's comment was. Through all of the boilerplate remarks, we know today exactly what we knew a week ago: there is no actual deal.
Oh well, we suppose the stronger response to the optimistic view of things goes to show how much the market fears the worst-case scenario of nothing getting done.
Avoiding a worst-case scenario should lower the equity risk premium. However, the sobering reality that is escaping a punch-drunk market right now is that a compromise, which will presumably entail higher taxes and lower spending, is going to weigh on economic activity.
It's obviously a positive if a recession can be avoided, but we fail to see the excitement factor in a GDP growth rate that is certain to be below potential.
On a related note, the second estimate to third quarter GDP showed economic output increasing 2.7% (Briefing.com consensus 2.8%). That was up from 2.0% in the first estimate, but the upward revision was due entirely to a change in inventories.
Real final sales growth, which excludes the change in inventories, was actually revised down to 1.9% from 2.1% in the first estimate.
The prevailing message is that the economy is growing, but at a rate that is below potential and which is making it difficult to put a major dent in the unemployment rate.
That is a good segue to the weekly initial claims report, which showed 393,000 claims for unemployment were filed in the week ending November 24 versus 416,000 the week before. That was close to expectations.
Superstorm Sandy has distorted the claims readings in recent weeks, but with the passage of time it is clear that claims are moving back into the 350,000-400,000 range where they have been bounded for the last year. In other words, they are not at a level that is suggestive of strong job growth.
At the moment, the cash market is poised to extend yesterday's reversal. The S&P futures are currently 0.4% above fair value as hopeful words right now are speaking louder than inaction on the fiscal cliff.