Did the Fiscal Cliff Really Charge the Market?

NEW YORK ( TheStreet) -- What if it wasn't the fiscal cliff that made the market jump?

As negotiations over the so-called fiscal cliff have saturated news sites for most of the week, it appeared natural for market headlines to suggest that President Barack Obama's remarks Wednesday afternoon fueled the uptick in major U.S. equity markets.

Obama appeared minutes after 12 p.m. EST when the Dow Jones Industrial Average was ticking slightly lower, but reached session highs just minutes after he concluded his remarks. And the market held those gains until the close at 4 p.m.

But with very few details emerging from closed-door talks, and no signal that legislators and the president are even close to solving the fiscal cliff -- when tax relief measures and deep spending cuts will automatically go into effect at the beginning of 2013 -- investors may want to reconsider how much these early comments are truly having on the markets.

"We humans suffer from narrative fallacies, I think is the term, is that we think things have to happen for a reason and sometimes it's just a case of there's more buyers than sellers," said Marty Leclerc, chief investment officer at Barrack Yard Advisors.

Leclerc said that he believes elected officials will eventually do something to solve the nation's fiscal troubles, and he said complacency among investors remains very high. In other words, eurozone woes, a China slowdown, and the U.S. fiscal cliff all are events very well known to the financial markets.

The president expressed confidence that both parties would agree on a framework in the coming weeks.

"In fact, my hope is to get this done before Christmas," Obama said Wednesday.

Though this would bring some optimism to some investors, it's difficult to infer more specifics from the president's remarks.

A framework doesn't necessarily imply how much in spending cuts or what tax increases would be made. Nor does it specify if Obama's hope to get things done before Christmas means a decisive fiscal year 2013 budget or if it would be a temporary band-aid to kick the deal into the first quarter of next year.

House Speaker John Boehner (R., Ohio) also made remarks that specifically called out Democrats and said they had to "get serious" about the spending problem. Though Obama and Boehner reiterated on Wednesday their beliefs that both sides could come to an agreement, the challenge by the speaker for Democrats to offer serious spending cuts is a vital roadblock to solving the whole cliff.

Central to this discussion is what Democrats are willing to cut, and what changes in tax-related issues that Republicans are willing to submit. Officials familiar with White House strategy are aware that certain Democrats have shown unwillingness to accept significant entitlement spending cuts, according to Politico.

Frank Fantozzi, chief executive of Planned Financial Services, said that he thinks Republicans will eventually be willing to consider increases in tax rates -- dividends, capital gains, upper marginal income rates -- but that these will be offset by concessions to Democrats on caps in deductions.

"I'd be surprised that we get something resolved by the end of the year; we've been telling our clients 'don't plan on it,'" said Fantozzi. "So I think the compromise is going to come in the first quarter ... what the president will probably do with the help of the Senate and everything else is make some short-term adjustments."

It also may be important to note that economic indicators this week have hinted at a strengthening U.S. economy.

"What's more, each slightly better-than-expected economic report that is ignored by investors who are focused almost exclusively on the cliff, may serve as an additional turn of the winch that may ultimately catapult equity prices progressively higher once investors feel confident that an improving economy won't be derailed," Sam Stovall, chief equity strategist at S&P Capital IQ, wrote in a note late Wednesday evening.

While the president's remarks may have been one factor that contributed to an uptick in equities on Wednesday, there was enough cynicism from Boehner that could have reasonably knocked back the surge. (Some market headlines credited Senate Majority Leader Harry Reid's (D., Nev.) pessimistic remarks on Tuesday with slugging the major indices in late afternoon trades.)

A final consideration among investors is that most of these early talks may simply represent political posturing. The president won re-election by a wide margin in the Electoral College and by a convincing majority in the popular vote. Obama's party also gained seats in the Democratic-controlled U.S. Senate and in the House of Representatives. It could be detrimental for House Republicans to refuse to compromise with the president and allow a full fiscal cliff to occur. Obama is finished with campaigning, but House Republicans must consider mid-term elections set to run in two years as they could receive part of the blame from American voters for thrusting the economy back into a recession -- something the Congressional Budget Office has said could happen if legislators allowed all changes to go through.

"Part of it, people have to realize, there's posturing going on," said Fantozzi. "The Republicans are playing chicken with a VW Rabbit; the Democrats, who really have a lot of strength, they're driving a big bus."

-- Written by Joe Deaux in New York.

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