The market experienced another tumultuous week as investors responded to fear about the looming debt ceiling and hope about a possible resolution. Despite the volatility, markets rebounded on Friday as hopes of a deal circulated in the media. For the week, the S&P 500 gained 0.75%, the Dow increased by 1.09%, and the NASDAQ lost 0.42%.
The government shutdown continued for another week, reaching its 11th day on Friday. Currently, about 500,000 federal employees are still furloughed, after many essential personnel were returned piecemeal to their jobs. Unfortunately, even if the shutdown were to end today, there will still be lasting effects as critical inspections have been left undone, research projects have been delayed, and workers have been left without pay for weeks. Some economists believe that the disruption of spending patterns among those affected by the shutdown - including civilian contractors not counted among the official furlough numbers - could affect consumer spending and economic growth numbers.
Congress is also grappling with the debt ceiling issue. The Treasury Department has informed Congress and the White House that it will reach the debt limit by Thursday, October 17, leaving it with enough cash for a few days of operations. If a deal is not reached by then, the U.S. will be faced with a potential default, which would cause major shocks throughout the economy and global financial system. While most analysts don't think lawmakers will allow a default to happen, financial institutions are quietly preparing for that eventuality.
There are however, signs of hope. The House of Representatives seems to be at a complete impasse and attention has now turned to the Senate, where Republican and Democrat leaders sat down over the weekend to try and hammer out a compromise. Relations between the two sides are much less fraught in the Senate and we can hope for a reasonable deal. However, any bill passed by the Senate would still have to pass muster in the House, where the environment is still highly politicized. On the other hand, failure by the House to pass a bill ending the shutdown and preventing a default would be highly costly to lawmakers at election time.
Earnings season is in full swing, but reports are largely overshadowed by the impasse in Washington. So far, it's too early to see a trend, but S&P 500 companies are expected to post third-quarter earnings growth of 4.2%. Out of the 31% of S&P 500 companies that have reported so far, only about 55% have beat expectations, below the historical average of 63%.
Looking ahead, it's likely to be another tumultuous week for markets. We don't know how close lawmakers are to a compromise, but we know from experience that Congress often waits until that last possible minute for a deal.
While we're optimistic, we are closely monitoring the situation and realize there are several potential market scenarios. As financial professionals, it's our job to worry about market movements so that our clients don't have to. If you have any concerns about your portfolio or any questions about how these issues may affect your investments, please reach out to us. We are always happy to help.
ECONOMIC CALENDAR:Monday: Ben Bernanke Speaks 8:00 PM ET
Tuesday: Empire State Mfg. Survey
Wednesday: Consumer Price Index, Treasury International Capital, Housing Market Index, Beige Book
Thursday: Housing Starts, Jobless Claims, Industrial Production, Philadelphia Fed Survey, EIA Petroleum Status Report
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.
Tweet causes oil prices to jump. Oil traders were jolted last week by a Twitter post by the Israeli Defense Force that suggested they might have bombed Syrian airports. Traders are increasingly turning to social media to stay on top of quickly evolving situations.
China's export growth fizzles. The Asian giant's export growth slid 0.3% as sales to Southeast Asia tumbled. The data was a disappointing break with a raft of other indicators suggesting China's economy might be on the rebound.
Consumer sentiment falls to 9-month low. The government shutdown and consumer malaise caused sentiment to decline, but only a small amount. Consumers were still optimistic about inflation and income, indicating that a quick rebound is possible if the government impasse ends.
Small business confidence dips. Confidence among U.S. small businesses fell in September as owners worried about the economy's near-term outlook. However, owners remain upbeat about sales forecasts and expansion prospects.
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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
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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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