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Norman: Debt Deal Gives Stocks a Green Light

With the House having passed a clean increase in the debt ceiling and barring any problems in the Senate, it looks as if the market will blister higher in the next few months as it continues to unwind a lot of bearish sentiment.

This is typically a strong period for the market as it is tax refund season and we're starting to see those refunds cascade in. Monday's huge $18 billion IRS tax refund brought the total for the month so far to $30 billion. The figure is $2 billion higher than the same time last year. Last February's $106 billion in tax refunds provided the launching pad for a strong 1,300 point rally in the Dow that took place from the February to May period.

While I have been saying that an increase in the debt ceiling was the last obstacle between the market and new highs (and significant new highs, I believe) I don't want to get overly excited because we still are running with quite a large federal spending shortfall relative to last year.

The most recent data now puts us at about $53 billion below last year's total spending figure at this time. That's not as bad as the recent high of $65 billion, but it still says we need to make up plenty of lost ground.

The good news is it that seems quite do-able with the debt ceiling out of the way, so stocks should really be entering a glide path higher from here on in.

Further out, it seems like the year is shaping up to be quite decent and even commodity markets are starting to perk up to confirm that. Gold just hit a three- month high, coffee is surging, cotton is at a four month high and as we get to the rest of my list we round it off with corn, wheat, soybeans, copper, sugar and orange juice all looking like they have put in a bottom.

How predictable was Tuesday's market rally off the comments made by Janet Yellen in her first testimony before Congress as Fed Chair? She basically pledged low interest rates far into the future, but with a continuation of the so-called taper, i.e., reductions in bond purchases.

Those purchases, far from being the removal of "stimulus" as everyone keeps saying, are more like the addition of stimulus. They keep those interest-bearing securities in the hands of investors who are the recipients of the interest income the government pays.

Just as a rule of thumb, every $10 billion reduction in asset purchases equates to approximately $3.6 billion of interest payments made into the economy. So far we've seen two $10 billion reductions, so that's $7.2 billion. If the program extends for the rest of the year, that's another $39.6 billion added to the economy. Right there we make up for much of the total spending reduction that I mentioned earlier.

I think the "doom and gloomers" have jumped the gun on this one and made a really bad call here. I haven't heard many of them reverse their views yet, but I am sure that will happen in time. But before they do, expect to see much higher stock levels.

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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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