Last Week in Brief.

October 22, 2013

Equity markets rose last week following the debt-ceiling debacle's culmination. Only after Fitch placed the U.S. credit rating on a negative watch.
The next crisis was scheduled for February 7th, providing time to Deck the Halls and croon Auld Lang Syne before submitting to another Federal water boarding.
The political standoff hurt millions of Americans, not to mention the flesh extracted from businesses and the economy, in general.
Yet, both parties were chastened. We have a difficult time believing either will be ready to jump back into the fray for February's showdown.
Accordingly, we are hopeful that the next couple of months are devoid of Federal politics, enabling us to focus on corporate earnings season.
Speaking of politics, Esquire and NBC News just released the results of a recent survey entitled, "13 Things That Define the New American Center." Among other findings, it shows that centrist Americans want less government, less intrusion into our personal lives, and a third party option, as they are fed up with Democrats and Republicans. Check it out.
The Good
We expect Q3 earnings season will follow the pattern established these last few years. Earning expectations have been lowered. Results will slightly outperform. And Q4 estimates will be lowered. As Q4 has traditionally been the most generous to equity investors, we believe that equities will likely pull back in October, followed by a November/December flourish to end the year.
Private economic indicators continue to show broad, albeit incremental improvements. Lacking government data due to the shut down, the private economic data was critical. Among other findings, it revealed that: Rail traffic continues to be strong; China's economy continues to grow; Initial jobless claims were lower.
According to Bespoke Investment Group, one can only hope that this shutdown concludes similarly to that of 1995. Following the 1995 shutdown, the market was up 3 percent a month later. Three months later the market had risen by 6.3 percent. The best performing sectors were computer hardware, software, financials, drug makers and consumer service stocks.
The Bad
Corporate earnings kicked off on a weak note. Earnings beats were down. Revenue beats, worse.
The Fed's Beige Book revealed very tepid economic growth. Government shutdown didn't help.
Worse, the NFIB Small Business Economic Trends data portends ominous happenings within the private sector. This survey asks firms what developments they view as the "single biggest problem" facing them. Answers traditionally include sales, regulation, taxes, input costs, inflation, labor quality, competition, etc. The recent survey shows that small firms are worried about a lack of sales (weak aggregate demand) and regulation. And of course, the "regulatory" concerns translate to the uncertainty created by ObamaCare.
We've long said that, while healthcare reform was necessary, it should not have been done while the U.S. labor market remained hobbled. Now, it's preventing firms from hiring as they seek to keeps costs as low as possible amidst the uncertainty ahead.
The Ugly
While the shutdown is over, the effects will linger in the form of slower economic growth. Some respected analysts believe it will be as much as 1 percent lower.
Worse, consider the progress, both social and scientific, that was completely turned off because of the partisan bickering. Check out this piece from Scientific American to see what we mean.
The Bottom Line
Investors who bought into the "fear trade" these last few weeks are now stuck with a lot of cash on the sideline and the opportunity cost of having missed last week's relief rally.
With everything that could have gone wrong over the last two weeks, one cannot help but feel that investors dodged a bullet. More importantly, the trend lines remain bullish.
Volatility is decreasing. Janet Yellen's Fed is likely to eschew tapering until Q1 2014. Gas prices are lower, which could enhance the holiday shopping season. Perhaps the political overhang of the last few weeks will abate just enough to enable investors to focus on earnings and, potentially, participate in a year-end rally.
Weekly Results
Major markets finished higher last week. The DJIA rose 1.07%, the S&P 500 gained 2.42%, and the Nasdaq soared 3.23%. Small cap stocks climbed 2.81%. And the 10-year Treasury bond yield fell 11 basis points to 2.58%. Gold rose $44.07 per ounce, up 3.46%.

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