Wishful Thinking Is Driving The Rally

As we write, it has been reported that President Obama has rejected the GOP proposal for a 6-week debt limit extension if it does not also re-open the government. The House could vote on the Republican proposal by Friday, although it is far from clear that it would pass. It not only faces substantial Tea Party opposition, but Democrats would not vote for the plan as well since it does not end the government shutdown. However, more negotiations are set, and the situation is fluid. Circumstances may change by the time you read this comment. However, even if a 6-week extension is finally agreed to by both sides, there is little reason to think that a deal can be worked out in the next six weeks, and it is likely that another crisis will follow.

Today’s strong market rally seems to us to be based on false hope and wishful thinking. After years of sharp disagreement, it appears highly improbable that a deal can be worked out under the pressure of six-week timeframe. If anything, the two parties seem further apart than they were a year ago when neither the budget super committee nor various congressional working groups were able to hammer out an agreement. The result was the sequester that still continues to put a damper on economic growth. The stock market and the economy, therefore, will probably continue to be under pressure for some time to come.

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