Buy the rumor; sell the news.
Market wags were dusting off that old saw on Wednesday after the Dow industrials jumped more than 205 points on expectations that a deal to reopen the government and raise the debt limit was at hand.
“The rally is baked in,” said Scott Clemons, market strategist at Brown Brothers Harriman.
Wall Street was relieved at the prospect of a last-minute deal to avoid a default, but the rancorous fiscal battle that has captivated the markets for three weeks is far from over.
“All it does is postpone the fight for another day,” Clemons said.
Under the last-minute deal, the government would be funded through Jan. 15, and the debt ceiling would be raised until Feb. 7. House and Senate negotiators are expected to agree on a long-term tax and spending plan by Dec. 13.
Not surprisingly, short-term debt markets were less enthusiastic.
The shutdown has already taken a toll. Standard & Poor’s said the fracas has cut $24 billion from the economy, slashing 0.6 percent from fourth-quarter GDP growth.
“If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks. That points to another humbug holiday season,” S&P said in a release.
Now investors must focus on corporate earnings growth, and that’s not a pretty picture either.
Companies have gone as far as they can with cost-cutting and now have to generate top-line growth — difficult in an economy that’s growing at an anemic 2 percent, analysts said.
“None of the data that’s coming out tells you that the economy is doing well,” said Steven Ricchiuto, chief economist of Mizuho Securities USA. “Earnings are not fantastic.”
With stocks trading below their highs in mid-September, he added, “This is not an equity market that is rocking and rolling on what’s happening in Washington.”