Was
the Washington Deal a trick or treat?
Markets
experienced one of the best weeks in months, with the S&P 500 setting a new
high after lawmakers finally struck a deal to reopen the government and raise
the debt ceiling. For the week, the S&P 500 gained 2.42%, the Dow gained
1.07%, and the NASDAQ gained 3.23%.[i]
An
agreement was finally reached last Wednesday to reopen the government, raise
the debt ceiling, and avert a default on U.S.
Unfortunately,
kicking the can down the road means that we’ll be revisiting the issue again
after the New Year. There’s a tremendous amount of mistrust not only between
the parties, but also within the Republican Party, meaning that the next fiscal
showdown may be just as acrimonious and drawn out.
An
eye-popping new report suggests that Congressional budget battles, debt ceiling
standoffs, and federal spending cuts have cost the country nearly 3% of GDP
growth since 2011 – roughly $700 billion in lost economic growth. Digging a
little deeper into the numbers, we discover that spending cuts alone have taken
a significant chunk – 0.7% - out of annual GDP growth since 2010. Worse, this
is an annual reduction in GDP growth, meaning the effects compound over time.[iii]
On
the positive side, it’s looking unlikely that the Fed will begin tapering this
year since economists will have difficulty weeding out the effects of the
shutdown from broader economic trends. According to Dallas Fed president
Richard Fisher, Congress didn’t just put on the economic brakes during the
shutdown, they “smashed the instrument panel,” making the timing of a taper
extremely uncertain.[iv] While some believe that a
December taper is still possible, it’s possible that the Fed will delay until
mid-2014.[v]
With
the default crisis averted, investors are now turning their attention to third
quarter earnings season. Overall, earnings are looking anemic again as
companies struggle with weak demand and declining profit margins. Thus far,
most of the earnings and revenue growth is coming from the finance sector,
which is reporting total earnings growth of 14.6%. As for the rest, even with
reduced earnings estimates, companies are having trouble meeting or exceeding
those expectations. Total earnings for the 99 S&P 500 companies that have
reported in are up 1.0% from the same period last year, with 62.6% beating
earnings expectations. However, excluding finance, total earnings growth from
those companies falls into the negative territory: -6.2%.[vi]
Markets
have a big week ahead of them as a slew of earnings reports will be released,
including major players DuPont (DD), Amazon (AMZN), Netflix (NLFX), and Ford
(F). Investors will also finally get a look at the delayed September jobs report
on Tuesday. It’s hard to know which way markets will move next week as
investors digest earnings reports and take a look at fourth quarter
expectations. If earnings data beats expectations, we could see the rally
continue. However, if the fundamentals look weak, investors could take profits
from the recent market highs and consolidate, waiting for good news. As always,
we’ll continue to keep an eye on things and keep you updated.
ECONOMIC CALENDAR:
Monday: Existing Home Sales, EIA Petroleum
Status Report
Tuesday: Employment Situation (Delayed)
Wednesday: Import and Export Prices, EIA
Petroleum Status Report
Thursday: Jobless Claims, PMI Manufacturing
Index Flash, New Home Sales
Friday: Durable Goods Orders, Consumer
Sentiment
.
HEADLINES:
476,000 new Obamacare applications. Administration officials released a
report stating that nearly half a million applications for insurance coverage
have been filed through state and federal insurance exchanges. However, no
information on how many have successfully enrolled in coverage was made
available, leaving analysts to wonder how close the administration is to their
goal of 7 million insured.[viii]
Treasuries gain on Fed bet. Treasury yields dropped to the lowest
level in 12 weeks as investors bet that the Fed will delay tapering until next
year. A falling yield is an indicator of rising demand for Treasury bonds,
indicating that investors may feel more confident about the strength of
Treasuries.[ix]
Dollar slides on economy worries. The U.S. dollar fell to its lowest
rate in more than eight months against the euro. Analysts say that the surprise
decision by the Fed to delay tapering caused the dollar to reverse its gains
and fall against the euro and basket of currencies. The Fed’s loose monetary policies
will continue to push the dollar down, making American exports cheaper but
having the opposite effect on imports and foreign travel.[x]
“Life isn't a matter of
milestones, but of moments.”
- Rose Kennedy
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