Markets' New-Year Euphoria Looks Overdone

Agenda-Setting Financial Insight.
Jan. 28 2013 7:08 PM

Markets' New-Year Euphoria Looks Overdone

Investors should take a deep breath and feel good – just not excessively so.

Photo by Spencer Platt/Getty Images

The new-year euphoria in financial markets looks overdone. The S&P 500 is up 5 percent, investors are throwing record sums into equities and Treasuries are flirting with 2 percent yields. But fiscal cliff diving can still hurt the economy and at least one incentive to put money to work may wear off.

There are reasons for optimism. Two-thirds of the S&P 500 companies that have reported quarterly earnings have beaten profit estimates, according to Thomson Reuters I/B/E/S. That, and Congress’s decision to make many Bush-era tax cuts permanent, has helped embolden retail investors, who poured a record $55 billion into equity mutual and exchanged-traded funds this month.


The last time such inflows reached an all-time high, though, was in February 2000 after the economy had grown at a 7 percent clip. That’s hardly the case today. BNP Paribas reckons the economy grew just 1.3 percent in the fourth quarter and will expand a mere 1.0 percent in the first three months of this year.

That’s largely because Congress didn’t walk far enough away from the fiscal cliff. Cuts slated for the defense budget along with the 2-percentage-point hike in payroll taxes will be a significant drag on the economy, potentially knocking nearly 1 percentage point off output, according to the French bank.

Americans aren’t likely to dip into their cash stashes that frequently unless there’s a decisive turn in the economy. Sure, depositors withdrew a whopping $76 billion from commercial banks in the first two weeks of the year, according to the Fed. But that was after a significant buildup before December’s fiscal cliff deadline. That suggests investors are simply relieved that matters aren’t getting worse.

Moreover, the expiration of a government guarantee scheme for noninterest-bearing accounts could also explain why some depositors decided to put long-dormant money to work. The Federal Reserve’s printing press is also playing a role as bond funds, which typically lose investors when stocks improve, swelled nearly $13.2 billion over the past three weeks, according to Lipper.

But a reality check looms in February when post-fiscal cliff economic data start rolling in. While it might not crash markets, if should quell some of the excessive enthusiasm. Investors should take a deep breath and feel good – just not excessively so. 

Read more at Reuters Breakingviews.


Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.


Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
Brow Beat
Sept. 20 2014 3:21 PM “The More You Know (About Black People)” Uses Very Funny PSAs to Condemn Black Stereotypes
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 20 2014 7:00 AM The Shaggy Sun
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.