Thursday, November 04, 2010

The Buzz That's Driving This Rally

Besides the Fed’s quantitative easing, a new buzz from Obama about extending all the Bush tax cuts is driving stocks up nearly 200 points today.

The president opened the door to full extension at his post-election news conference yesterday.

Today, Obama spokesman Robert Gibbs acknowledged this possibility at a news gaggle.

Gibbs said the administration is “open” to negotiations on extending tax cuts for upper-income individuals in order to win extensions for middle-income families. Gibbs did add, however, that the president still “does not believe it’s a good idea.”

But here’s the key: Two Democrats elected to the Senate on Tuesday, Chris Coons of Delaware and Joe Manchin of West Virginia, campaigned on extending all the Bush tax cuts. Since they will fill the seats of Joe Biden and Robert Byrd, they will be seated during the lame-duck Congress coming in a few weeks.

And there are roughly a half-dozen additional Senate Democrats — at least — who would vote for a two-year extension of all the Bush tax cuts. Plus, there will now be 46 or 47 Republican senators voting for them, too. And over in the House, about 40 Democrats signed letters and campaigned for extending all the Bush tax cuts. So the outlook for the full Bush is getting good, and the hope that we will avoid an economic train wreck is rising.

One key point about today’s rally is the lack of year-end tax selling, based on the idea that the capital-gains tax would jump from 15 percent to 20 percent and the dividend tax from 15 percent to 39.6 percent. Tax selling has been hanging over the market. But with Obama moving to the center, and newly elected Senate Democrats in favor of the full Bush, things are looking a lot better for stocks and the economy.

Full Bush extension, by the way, might just add some business confidence to the picture, which could lift job creation next year. Profits are very strong, and the early October ISMs came in above expectations. So did car sales at almost 12.5 million. So keep your fingers crossed.

But surely the election results are sending a strong message to Washington. The next step will be big budget cuts through congressional rescissions and policy changes. That, too, will generate confidence and reduce uncertainty.