Citi Summarizes The Post-Deal State Of The Markets In One Brutally Sobering Paragraph

Tobias levkovichREUTERS/Brendan McDermidTobias Levkovich, Citi

Finally, President Obama has signed into law an agreement that will raise the U.S. debt ceiling and end the government shutdown.

Optimism for a deal ignited a major rally in the stock markets, which are once again within reach of all-time highs.

But in a brief 7-page note to clients, Citi’s Tobias Levkovich warns us that averting disaster should not be confused with problem solved.

“The latest agreement though only punts an immediate risk to a few short months away and thus should not give rise to much optimism,” wrote Levkovich, Citi’s Chief U.S. Equity Strategist. “Yet, the VIX has dropped back to below 15 from more than 20, illustrating some element of new complacency settling in.”

Here’s the key paragraph:

Kicking the proverbial can down the street does not address the long-term fiscal imbalances. The twin decisions of a taper timing push out and the discord in Washington being swept under the rug until January and February roll in could keep P/E multiples more compressed as equity risk premiums stay elevated. Investors typically do not like uncertainty and it is hard to determine how these recent almost non-decisions can be seen as reinvigorating confidence aside from some relief that an imminent likely disaster has been avoided. Nonetheless, one cannot respectably believe that things truly have turned for the better as opposed to averting the worst. The long-term growth of non-discretionary government spending can still prove to be an overwhelming liability and it has not been the primary focus for legislators.

“A Senate led proposal to delay the CR (thereby ending the government shutdown) and defer the debt ceiling is not truly addressing the huge problems facing the country on government spending for non-discretionary items (see Figure 1) like welfare and health care given the large number of ageing Americans,” expanded Levkovich.

So, as long as the long-term problems go unresolved and unaddressed, stocks won’t be able to realise their full bull market potential.

Levkovich sees the S&P 500 ending the year at 1,650.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.