Save for reports of an apparent uprising by Shiite forces in Basra -- which helped push crude futures down 2.4% to $27.97 per barrel -- Tuesday provided a respite from "major" news on the war in Iraq. In the absence of significant headlines on the military front, traders focused on (
) fundamental issues such as economic data and the budget process in Washington.
In the end, major averages recouped a decent amount of
Monday's losses, despite finishing off the session's best levels.
After trading as high as 8337.72 shortly after 1 p.m. EST, the
Dow Jones Industrial Average
closed up 0.8% to 8280.23. Following similar patterns, the
finished 1.2% higher to 874.74, vs. its intraday high of 879.87, while the
rose 1.5% to 1391.01 after trading as high as 1400.10.
The session hinted at underlying bullishness among market participants who may have missed the bulk of last week's rally and felt Monday's setback gave them an opportunity to re-establish long positions. Notably, volume was slightly higher than the previous day's, with 82.5% of the
1.3 billion shares to the upside, while advancing stocks led decliners 23 to 9.
The session's most notable setback came midafternoon amid reports the Senate
passed an amendment to more than halve President Bush's proposed tax cut to around $350 billion, from $726 billion. The vote was a surprise to many Washington watchers, since the Senate defeated a similar proposal last Friday.
"Even some Republicans are not crazy about the size of deficits that Bush is bringing to bear, and most people say, given the economic downturn, it's hard to imagine providing both guns and butter without a cost," said Marc Chandler, chief currency analyst at HSBC Holdings. "It's natural to support the president at wartime" but this vote suggests Bush's support is "still vulnerable."
Wall Street has generally viewed Bush's tax package as a positive development, and this setback to the president's agenda hampered shares Tuesday afternoon. However, the setback proved short-lived as traders realized that the operative word in budget process is "process."
"It's a disappointment to anyone who wanted to see 100% exclusion of dividend taxes," said Greg Valliere, managing director of Charles Schwab's Washington research group. "This now makes 100% exclusion very unlikely. Half a loaf, 50% exclusion, is the most Bush can hope for."
That said, Valliere stressed Tuesday's Senate vote is "part of the negotiating dance," noting that the House of Representatives "passed a much bigger version. So this sets up a bargaining session."
Last week, the House passed a budget proposal that included all of Bush's $726 billion tax-cut request.
Perhaps a realization that "the stimulus still lives," as Valliere put it, helped stem any selling linked to the Senate vote.
Furthermore, while there was some gnashing of teeth over what Bush didn't get from the Senate, it looks like
$350 billion of additional tax cuts are going to be included in whatever final budget Congress (presumably) passes. Also, Valliere recalled that when the initial "leaks" of the dividend tax-cut idea came out, it was reported that the president wanted 50% exclusion, not the 100% later proposed.
Of course, perception is reality, especially in Washington D.C., but Bush and company may get a lot of what they want, even if it isn't the whole enchilada. For example, Sen. Fritz Hollings (D., S.C.) voted for today's 50% proposal after last week refusing to vote for any tax cut.
In sum, Chandler agreed that "the key story today is the stock market and the dollar rebounded after being hit hard" on Monday and, the dollar at least, early Tuesday. After climbing back from an early decline, the U.S. Dollar Index ended off 0.15 to 100.84
Beyond the Senate vote on the tax package, Chandler said President Bush's separate but related request for a $75 billion emergency supplemental spending bill was significant in that it will only cover the first six months of the war. HSBC is forecasting $400 billion in federal budget deficits this year, which would be about 4% of GDP.
Nevertheless, Chandler isn't overly concerned about a negative effect on the dollar, as are many others.
Larger deficits likely will lead to more government borrowing and increase the current account deficit, which is the greenback's "Achilles heel," he conceded. But increased Treasury borrowing won't be so large as to "crowd out" private sector borrowing, the strategist predicted, adding that U.S. monetary and fiscal policies are far more "pro growth" than those in Japan and Germany. "Out of the three, I still prefer the U.S. mix," he said, noting that Japan's deficit is nearly 10% of GDP, "yet no one is saying it's going to drive the yen lower."
Of course, some folks believe all major currencies are headed for a fall for these and other structural issues. These people, sometimes called "gold bugs," were likely disappointed by the yellow metal's 0.3% dip to $328.30 per ounce while alternately enthused by the 0.8% gain for the Philadelphia Stock Exchange Gold and Silver Index.
More Beltway and Other News
The stock market's rise came despite another drop in the Conference Board's consumer confidence index, to a near 10-year low of 62.5 in March vs. an upwardly revised 64.8 in February. Separately, the National Association of Realtors reported that February's existing-home sales fell 4.3% from January's record-setting pace.
Despite the negative headlines, both the confidence and home sales data were better than expected, helping provide a boost to shares.
Furthermore, "very little of the recent equity market rally and falling oil prices is likely reflected in the current
confidence reading," noted Gerald Cohen, senior economist at Merrill Lynch.
February's decline in existing-home sales, however, "does not likely capture February's snowstorms, nor February's decline in mortgage rates, which should offset some of the snowstorm's effect," Cohen observed. The economist further noted that sales fell in all regions save the western U.S. "Weak economic fundamentals suggest that the housing market will continue to soften in coming months," he wrote.
Nevertheless, the S&P Homebuilding Index finished up 1%.
Treasuries ran counter to stocks, in keeping with recent trends (there has been more than a 90% correlation between the 10-year and the S&P 500 in the past few years, according to Bianco Research). Treasuries were strong early in reaction to the aforementioned economic data, then weakened as stocks improved at midmorning, before strengthening again late in the day. The end result was that the price of the benchmark 10-year note closed up 4/32 to 99 13/32, its yield falling to 3.95%.
Among stocks in the news, airlines jumped after Senate Majority Leader Bill Frist (R., Tenn.) and Treasury Secretary John Snow made separate comments suggesting some federal aid for the industry would be forthcoming.
Led by a 8.2% gain in American Airlines parent
, the Amex Airline Index rose 3.3%.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.