Resilience in the Face of Adversity
The current state of affairs in our nation’s capital has caused the neon sign on the front door of the U.S. government to read “Closed for Business,” at least temporarily. Lines have been drawn in the sand, and negotiating teams have assembled, only to have nobody show up to negotiate. “We will not negotiate” comes from one side, while “we are here to negotiate” comes from the other. Somewhere in the middle lies the truth, but nowhere to be seen are the two team members known as common sense and compromise. Hopefully they show up to play in the near future. It is estimated that for every week the government is shut down, 0.2% can be deducted from the fourth quarter gross domestic product (GDP). GDP estimates for the 4th quarter currently stand at 2.5%. If the government remains shut down for a couple weeks, we’ll report a GDP number of approximately 2%. Weakness in the final quarter of the year is expected to be followed by a pickup in 2014, with full-year 2014 estimates now at 2.65%-not robust, but positive.
The shutdown all but assures that the Federal Reserve will maintain its quantitative earning (QE) program through the remainder of 2013, providing additional stimulus to the economy. Earnings season is upon us, and we’ll see the data continue to roll out over the next several weeks. Pay particular attention to the forward guidance in understanding how the current state of affairs is playing into the psyche of U.S. corporate leaders. They will attempt to articulate how their businesses will fare over the next several quarters given the implementation of the Affordable Care Act coupled with the lingering sequestration and government shutdown effects. On the heels of earnings season, the all-important holiday shopping season, which is a gauge of consumer confidence, provides a key input to market sentiment. That sentiment is influenced positively by consumer balance sheets showing new highs in household net worth, wage increases that are exceeding inflation and an equity market up nearly 20% year-to-date. Additional fuel to the equity market has been the performance of fixed income throughout this period of rising rates. Many fixed income investors are seeing negative year-to-date returns with the 30-year U.S. Treasury bond down over -11% and the Barclays Aggregate Bond index down -1.89%. Municipal bond investors have felt the same stress. The result is a rotation out of bonds and into stocks, with seasonality favorable November through March.
After a week of government shutdown, we ended the week of September 30 at nearly exactly the same place as we started it. The S&P 500 equity index closed at 1691.75 on Friday, September 27; one week later on Friday, October 4, the index closed at 1690.5, a net change of -0.07% after all the political and financial gyrations. The U.S. dollar slipped by -0.16%, gold declined -1.91% and the yield on the U.S. 10-year Treasury rose by less than 3 bps, from 2.62% to 2.645%. All things considered, the markets exhibited resilience in the face of adversity. Attention will now shift to the debate on the debt ceiling, which will continue to inject uncertainty into the markets.
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