Stocks Rise as Tax Cuts Trump Job Cuts

On the surface, Thursday's equity rally seemed another example of bullish resistance to negative news, including an unexpected spike in weekly jobless claims and overriding concerns about valuations, economic growth, and terrorism. In reality, there were some honest-to-goodness positive developments for shares, including congressional agreement on a tax cut and the United Nations' lifting sanctions against Iraq, which helped push crude futures down 0.6%.

In addition, the forthcoming Memorial Day weekend may have given some heavily shorted stocks and sectors a boost, as traders squared up positions in anticipation of the holiday. For example, the Amex Biotech Index rose 4.1% and the S&P Homebuilding Index jumped 6%.

Major averages rose steadily throughout the session before fading a bit in the final 30 minutes of trading. The Dow Jones Industrial Average closed up 0.9% to 8594.02 vs. its intraday best of 8628.14, while the S&P 500 gained 0.9% to 931.87 after trading as high as 935.30, and the Nasdaq Composite climbed 1.2% to 1507.55 vs. its apex of 1512.80.

The final-hour fade somewhat undermined the significance of the rally, as did market internals. At 1.45 billion shares on the Big Board and 1.7 billion over the counter, trading volume was solid, but not huge, while market breadth was not exceedingly positive. Gainers led 2 to 1 in New York Stock Exchange activity and by 19 to 12 in Nasdaq trading.

Such technical glitches notwithstanding, some traders suggested the advance harkened a return to the upward momentum of the five weeks prior to Monday's sharp setback and two days of sideways action thereafter. (Bears, naturally, contend this is the "last gasp" of a rally that effectively ended with the intraday highs hit last Friday by the Dow and S&P, and on Thursday by the Comp.)

The veracity of such views remains to be seen but (as mentioned above) there were some upbeat developments. Chief among them was expected congressional passage of a roughly $350 billion package that lowers but does not eliminate taxes on both capitals gains and dividend taxes, with so-called sunset provisions. (As theorized here, dampened expectations regarding dividend tax relief may have made its actuality a bullish development.)