The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Last week's decline of about 4% in the S&P 500 marked the index's biggest weekly loss in more than a year and was driven primarily by the debt-ceiling impasse.

Now that the parties in Washington have crafted a deal to raise the debt ceiling by $2.1 trillion in exchange for $2.4 trillion in spending cuts over the next 10 years, a modest relief rally may ensue in the stock market.

However, the deal does not go far enough to put the U.S. on a path to fiscal sustainability, nor does it decisively remove the threat of a downgrade to the nation's triple-A credit rating.

The spending cuts to narrow the deficit will be phased in slowly with little effect until 2013, after the next election, resulting in minimal impact on the economy in the near term.

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We say a modest rally because stocks are still up 4% for the year after having pulled back and because the market is likely to continue to be held captive by Washington for the rest of 2011.

The budget agreement that averted a government shutdown earlier this year, and that presaged the current battle in Washington, only funded the government for the 2011 fiscal year, which ends Sept. 30.

Although the current deal-making in Washington may alleviate the problem of having "run out of debt capacity," the government will soon "run out of money" if another deal is not reached by the end of next month to avoid a shutdown.

This means another market volatility-inducing budget battle is on tap for early this fall. And the vote by Congress on finding the second $1.5 trillion of spending cuts and boost to the debt ceiling is set for Dec. 23.

In fact, the latest battle over the national debt reflects only a small portion of the nation's total liabilities, and interest cost accounts for only about 6% of government spending.

The bigger problem is in the mandatory spending, or entitlement portion of the budget, where much bigger liabilities such as Medicare, Medicaid and Social Security account for nearly half of all spending and seven times what is spent on servicing the nation's debt.

The nation is still not on a path to fiscal sustainability. This serves as a reminder that the markets are going to have to deal with ongoing fiscal fights for the foreseeable future.

Nevertheless, stocks may post a modest relief rally in the coming weeks on a debt-ceiling agreement that avoided sharp spending cuts and a potential default. Stocks would likely be higher if it were not for the concern over the impasse in Washington. The backdrop for the stock market outside of Washington has been improving with further evidence coming to light last week:
  • Strong earnings (despite weak second-quarter economic growth in the U.S.) and guidance for the rest of the year were reported,
  • Retail sales were reported up about 5% year over year for the third week in a row,
  • Initial filings of claims for unemployment benefits fell to less than 400,000 and have been improving steadily in recent weeks.

The improving environment may inspire investors to re-engage the markets and reduce defensive positions as the debt-ceiling concerns lift. Consider reducing defensive positions in favor of the following areas:
  • Stocks in the economically sensitive technology and consumer discretionary sectors,
  • Mid-cap growth stocks benefiting from a firming economic soft spot in the U.S., rebounding business confidence and the acceleration in merger and acquisitions.
  • Japanese stocks benefiting from a rebound in the world's third-largest economy.
  • High-yield bonds as investors increasingly seek yield, rather than safety, in bonds.

The flip side of the stock market rally is that safe havens such as precious metals and even government bonds may surrender some of their gains achieved in the last week or so as gold soared to new highs. However, it is unlikely to be clear sailing for the rest of the year as volatility is here to stay.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Jeffrey is Chief Market Strategist and Executive Vice President at LPL Financial.