Markets' New-Year Euphoria Looks Overdone

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

Markets' New-Year Euphoria Looks Overdone

160230189
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.

Advertisement

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.

Agnes T. Crane is a Reuters Breakingviews columnist, based in New York, where she covers capital markets and Latin America. She joined from Dow Jones Newswires, where she was an award-winning journalist who led a team of reporters covering the credit crisis.

TODAY IN SLATE

Politics

Smash and Grab

Will competitive Senate contests in Kansas and South Dakota lead to more late-breaking races in future elections?

Stop Panicking. America Is Now in Very Good Shape to Respond to the Ebola Crisis.

The 2014 Kansas City Royals Show the Value of Building a Mediocre Baseball Team

The GOP Won’t Win Any Black Votes With Its New “Willie Horton” Ad

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Technocracy

Forget Oculus Rift

This $25 cardboard box turns your phone into an incredibly fun virtual reality experience.

One of Putin’s Favorite Oligarchs Wants to Start an Orthodox Christian Fox News

These Companies in Japan Are More Than 1,000 Years Old

Trending News Channel
Oct. 20 2014 6:17 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Politics
Oct. 20 2014 8:14 PM You Should Be Optimistic About Ebola Don’t panic. Here are all the signs that the U.S. is containing the disease.
  Business
Moneybox
Oct. 20 2014 7:23 PM Chipotle’s Magical Burrito Empire Keeps Growing, Might Be Slowing
  Life
Outward
Oct. 20 2014 3:16 PM The Catholic Church Is Changing, and Celibate Gays Are Leading the Way
  Double X
The XX Factor
Oct. 20 2014 6:17 PM I Am 25. I Don't Work at Facebook. My Doctors Want Me to Freeze My Eggs.
  Slate Plus
Tv Club
Oct. 20 2014 7:15 AM The Slate Doctor Who Podcast: Episode 9 A spoiler-filled discussion of "Flatline."
  Arts
Brow Beat
Oct. 20 2014 9:13 PM The Smart, Talented, and Utterly Hilarious Leslie Jones Is SNL’s Newest Cast Member
  Technology
Technocracy
Oct. 20 2014 11:36 PM Forget Oculus Rift This $25 cardboard box turns your phone into an incredibly fun virtual-reality experience.
  Health & Science
Bad Astronomy
Oct. 21 2014 7:00 AM Watch the Moon Eat the Sun: The Partial Solar Eclipse on Thursday, Oct. 23
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.