Why the Dow Has a Drug Problem
Jan 2nd 2013 10:00PM
Updated Jan 2nd 2013 10:06PM
Well, that felt good.
The Dow Jones Industrial Average (INDEX: ^DJI) soared today, climbing 308 points, or 2.4%, and the blue chips gained more in its first day of 2013 than on any day in 2012. The S&P 500 and the Nasdaq did even better, climbing 2.5% and 3.1%, respectively, and major European markets and the Hang Seng all gained at least 2%. As you've probably heard by now, the House late last night passed the Senate's legislation to avoid the fiscal cliff and the subsequent economic face-plant that had been promised.
While a deal is better than no deal, the agreement avoids much of the difficult decision-making that the fiscal cliff had intended to make so urgent. The new law extends Bush-era tax cuts for those individuals making under $400,000, but it only delayed the reckoning on the thornier side of negotiations, putting off spending cuts for two months.
Don't be surprised to see a rehash of this political drama come February. To make the stakes even higher, this time around the debt ceiling will also need to be raised.
Politicians had said they didn't want to scare the markets, and they got their wish. Wall Street, forever focused on the short term cheered the agreement as it won't derail the economy for now, but the inability to deal with debt and deficits is a problem for both Washington and the financial markets. Like a drug addict, the market goes for a quick fix to save it from the pain of dealing with withdrawal symptoms or, in this case, bloated government spending. But the short-term solution will only make the necessary treatment more difficult, and only delays the agony of taking the bitter medicine.
Not surprisingly, every stock on the Dow was up today. Hewlett-Packard (NYS: HPQ) and Caterpillar (NYS: CAT) paced the pack with gains of 5.4% and 4.3%, respectively. HP shares have soared since the drop following the Autonomy writedown, and jumped today after the company said it may sell underperforming assets but keep its core PC business. While it's unclear what those assets might be and whether the company can find a buyer for them, investors are rewarding any attempt by the company to "unlock value," as the stock company seems to be nothing more than a value play at this point with the company fast turning into a dinosaur.
Caterpillar, meanwhile, did not benefit from any company-specific news, but as the world's largest maker of earth-moving equipment, the manufacturer is highly sensitive to the global economy. The realization that the fiscal cliff has been averted favors Caterpillar more than most Dow stocks.
Outside the Dow, Zipcar (NAS: ZIP) shot up 48% after Avis (NAS: CAR) announced it would buy out the car-sharing upstart for $12.50 a share. That price is well below the $18 that Zipcar had debuted at less than two years ago in April 2011, which likely leaves some shareholders holding the bag. Zipcar stock had fallen over the last two years as it disappointed the market with slowing growth and an inability to make a meaningful profit. Avis had no skin in the car-sharing game, and plans to take advantage of cost-saving synergies with its new car-sharing wing.
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The article Why the Dow Has a Drug Problem originally appeared on Fool.com.Jeremy Bowman has no positions in the stocks mentioned above. The Motley Fool owns shares of Zipcar. Motley Fool newsletter services recommend Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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