Stocks Soar on News of Rapidly Shrinking Paychecks

Was yesterday’s stock market rally based on fundamentals or emotions?

Come on, bro, you know better.

But so what? Emotions (we call them “sentiment” or “psychology” on The Street) have as much to do with driving returns as actual earnings or interest rates do. That’s where the “P” in PE ratio comes from, after all – what price are you willing to pay for a given earnings coefficient?

Nick Colas, Chief Strategist at ConvergEx Group, agrees that yesterday was more a giant exhale than any kind of re-evaluation of fundamentals for the corporate profit outlook…

Yesterday’s rally in global equities – especially U.S. stocks – is difficult to explain, at least with conventional reasoning. The deal struck between Democrats and Republicans leaves a lot of unanswered questions, including a still-needed increase to the Federal Debt Limit, spending cuts to replace the 2011 sequestrations no one liked, and a reasonable approach to containing the long term growth of health care expenses in programs such as Medicare and Medicaid.  The market’s positive response was a bit like giving a gold medal to the last man across the finish line, more in celebration of his effort than the result.

No – yesterday’s move seemed emotional rather than reasoned…

If you don’t agree that impersonal financial marketplaces will succumb to cultural analysis, let me turn a hardened eye to the oddest bit about yesterday’s close-on-the-highs fireworks: most workers are seeing their taxes go up and their take-home pay go down in 2013 as compared to last year.  Yes, in the midst of Democrats happy over higher tax rates for the “Rich” and Republican relief that defense cuts won’t kick in just yet, no seems to be too much worried that paychecks are getting smaller for just about anyone who works “On the books” in America.

Nick goes on to show how, with 79% of households make under $100,000 a year, many Americans are subject to the full brunt of the regressive social security tax hike that will remove approximately 4% of people’s annual spending power. ConvergEx handicaps this as a roughly 50 basis point drag on the economy in 2013.

So surely, the 3% explosion in stock prices wasn’t based on that outcome.