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%.
An agreement was finally reached last Wednesday to reopen the government, raise the debt ceiling, and avert a default on U.S. debt. The deal came on the 16th day of the shutdown and just one day before the U.S. Treasury would have hit the debt ceiling and exhausted its ability to borrow money. Now here's the bad news: the deal maintains the sequester and only funds the government through January 15 and raises the debt ceiling until February 15.
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.
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. While some believe that a December taper is still possible, it's possible that the Fed will delay until mid-2014.
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%.
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
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov . International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
China's economic growth rebounds. After several periods of anemic growth, China's GDP growth surged to 7.8%, easing pressure on leaders for more economic stimulus and allowing them to focus on long-term reforms.
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.
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.
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.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.
The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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