“Oh, Eddie… If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised than I am now…” -Chevy Chase as Clark Griswold, reacting to his Cousin Eddie (played by Randy Quaid) showing up unexpectedly at Christmas in the movie Christmas Vacation, 1989

All of the major equity indices, with the exception of the Dow Jones Industrial Average (DJIA), hit new highs for the year last week as the news broke of a tax deal that everyone, including us, have been expecting and waiting on.

I begin with this headline I read over the weekend – “Everyone’s Bullish and That’s Bearish”. 

Ugh.

Does anyone remember a headline that said – “Everyone’s Bearish and That’s Bullish”?

I don’t.  Anyone surprised?  Clark?  Eddie?

The equity markets we track in this report were all up for the week.  The Dow Jones Industrial Average (DJIA) gained 0.25% last week to finish at 11,410, the S&P 500 Index gained 2.28% to end at 1,240, and the Nasdaq Composite Index rose 1.78% to finish at 2,638.  The Russell 2000, which measures smaller capitalization stocks, rose 2.70% to finish the week at 777.

The excitement last week was mostly centered on the news that an agreement was reached between President Obama and the Republican leadership over the extension of the Bush-era tax rates. This was good for the equity markets because it extended the current marginal tax rates for all tax brackets, provided an extension of unemployment benefits for 13 months, cut payroll taxes and lowered the rates on estate taxes – the last part being a shock and surprise to everyone.  Let’s call it an unexpected ‘kicker.’

The real benefit comes from the fact that disposable income is now forecast to be higher across all households.  We hope that this continues the ‘trifecta’ of increased consumer spending, household debt reduction and throwing a little money into the old saving account.

There was some solid evidence last week which showed that U.S. growth is rebounding.   We thought the most important piece of news outside of taxes was that unemployment claims declined. Additionally, we saw our favorite economist, Ed Hyman of ISI Group, raise his 4Q GDP number up from +2.0% to +3.0%…that’s a big move.  He cited the 2% payroll tax cut as a major component of economic stimulus.

It’s also nice to see a cloud of uncertainty removed.  The fact is, businesses hate uncertainty and with elections behind us, QE2 being executed, and some signs of a pro-growth agenda coming out of Washington, things are looking up…and the market seems to agree.  Additionally, it’s nice to see my daily readings free of references to the “double-dip” that permeated so much of the news back in the summer.

We are still have a positive outlook on the equity markets and are over-weight the small and mid cap space and the technology sector.  We are still looking at investments in areas OTHER THAN bonds for fixed income allocations.

Call us for help or if you have any questions.   

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

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