October 2013 Economic Outlook

Sweeney, Greg

Read our Economic Outlook, a monthly newsletter authored by Greg Sweeney, CFA, chief investment officer at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 28-year veteran of the Investment Management team.

 

Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on October 30, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed continues to indicate that rates will remain near these lows until 2015, but dissension remains among the Fed members on this subject.

Inflation

  • The most recent year-over-year consumer price index (CPI) hit 1.5%. This is below the 2.0% level reported in the previous month as expected. We expect another decline this month. The next release in the range of 1.25% seems reasonable.

Economic Activity

  • Let’s start with clarifying some of the rhetoric in the news. Just because the U.S. government reaches the debt limit does not mean it will run out of money. About $250 billion in taxes are collected by the federal government each month. Reaching the debt ceiling means the government will not be able to spend money in excess of what comes in. The government would have to prioritize where the money is spent – just like we have to do in our own households.
  • The question in this government shutdown is how much debt we are willing to push onto our children. There appear to be two distinct beliefs. One group thinks $17 trillion is too much. The other group thinks $17 trillion is not enough. If $17 trillion is not enough, what is?
  • Another disappointing theme in this shutdown is the vindictive government stance. Do we really need the federal government to be “open” to take a walk in the woods on federal land? Do we need the government to be “open” for veterans to visit an open-air monument? Most of us would say “no,” but there are extraordinary measures taken by the Feds to assure people get bullied by their own government. Furloughed federal workers who are trying to keep up with their responsibilities during the shutdown have been informed it is a “criminal act” to use government resources such as email when furloughed (even though they will all likely be paid in full when this is over.)
  • In the U.S., the government is supposed to be run by the people, but it now appears the people are being run by the government. This author sees this as a very disturbing shift.

Fixed Income

  • Interest rates on the 10-year Treasury have moved down to 2.65% from the peak of 3% in September. The Federal Reserve did not begin to taper its quantitative easing (QE) program as most of the market expected them to do. If we read between the lines, the decision to continue the full amount of QE is an admission by the Fed that the economy is still not doing very well.
  • The consensus is that yields will be moving higher. With no near-term threat from inflation and little progress in economic growth, the movement in that direction may be delayed for a bit longer.

Stock Market

  • Last month, we suggested caution in the stock market may be prudent. After rallying into mid-September, it has since sold down to levels near where the market started in September. The release of third-quarter earnings begins this month. We expect to see little improvement in top-line revenues while bottom-line earnings are supported by efficiencies, cost cutting or both.
  • The QE program used by the Federal Reserve remains at full strength, which suggests the stock market will regain traction once the shutdown is gone from the headlines and earnings don’t disappoint investors.

View previous Economic Outlook newsletters.

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