Tax Compromise is Gift to Markets as Traders Await Santa Rally

Published: Monday, 6 Dec 2010 10:12 PM ET

The proposed extension of Bush era tax cuts is another gift to markets and makes a year-end Santa rally even more likely.

President Obama Monday said he would support a tentative compromise to keep in place all Bush tax cuts for two years, as well as extend unemployment benefits for 13 months. The White House also added a reduction in the Social Security tax for workers to 4.2 percent from 6.2 percent for a one-year period.

Traders and analysts, for weeks, have been predicting an extension of all of the tax cuts, including those that keep capital gains and dividend taxes at a maximum 15 percent.

However, if those tax cuts and taxes for the wealthy were not to be extended, as proposed by some Democrats, traders had expected to see stock market selling. They also had been expecting a relief rally once a deal was announced. The deal still needs approval of Congressional Democrats.

James Paulsen, chief investment strategist at Wells Capital Management, said he thinks any relief rally will be limited. "It's all in the market. It was as expected. Anything less would have been bad."

"I think, more than anything, the certainty and tax predictability will help business job creation and the economy," Paulsen said.

U.S. stock futures turned slightly positive Monday evening, after President Obama announced the tax deal at about 6:30 p.m. New York time. The Dow Monday had ended down 19 at 11,362, and the Nasdaq was up 3 at 2594. The S&P 500 fell 1 to 1223.

(Kindly click on the Title to link to CNBC news for more, Source: CNBC)