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'Cliff' Deal Sends Stocks Up, But Problems Lurk

"Washington negotiations remind me of the Beach Boys song, 'We'll have fun, fun, fun 'til her daddy takes the T-Bird away,'" Jack Ablin, chief investment officer of BMO Private Bank in Chicago, wrote in a note to clients.

"Nothing got solved," added T. Doug Dale, chief investment officer for Security Ballew Wealth Management in Jackson, Miss.

According to these and other market watchers, investors were celebrating Wednesday not because they love the budget deal that was cobbled together, but because they were grateful there was any deal at all.

"Most people think that no deal would have been worse than a bad deal," said Mark Lehmann, president of JMP Securities in San Francisco.

The House passed the budget bill late Tuesday night, a contentious exercise because many Republicans had wanted a deal that did more to cut government spending. The Senate had already approved the bill.

The late-night haggling was a product of lawmakers wanting to avert a sweeping set of government spending cuts and tax increases that kicked in Tuesday, the start of the new year, because there was no budget deal ready. The scenario came to be known as the fiscal cliff, because of the threat it posed to the fragile U.S. economic recovery.

The bill that passed Tuesday night ended the stalemate for now, but it leaves many questions unanswered.

The deal doesn't include any significant deficit-cutting agreement, meaning the country still doesn't have a long-term plan or even an agreement in principle on how to rein in spending. Big cuts to defense and domestic programs, which were slated to kick in with the new year, weren't worked out but instead were just delayed for two months. And the U.S. is still bumping up against its borrowing limit, or "debt ceiling."

"There's definitely another drama coming down the road," said Lehmann. "That's the March cliff."

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Chart of I:DJI
DOW 17,798.49 -14.90 -0.08%
S&P 500 2,090.11 +1.24 0.06%
NASDAQ 5,127.5250 +11.3820 0.22%

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