The Markets:
Halloween falls on the last day of October, but it was the start of the month that opened on a dark note. A deadlock in Washington, D.C. led to the first government shutdown since late 1995, there was a slight possibility the Treasury could default on its debts, and there was no shortage of commentary as to who might be to blame.
One thing that is certain, the government shutdown and the debate over raising the debt ceiling received heavy play in the media. It also created a fair degree of angst among investors and was the focus of attention during the month of October.
When an agreement was reached on October 16, the Dow Jones Industrials had advanced 1.6% since the start of the shutdown, while the S&P 500 Index increased 2.4%. Yes, we did experience some volatility including four days with Dow losses that exceeded 100 points and three days when the Dow posted gains in excess of 100 points.
The debate over raising the debt ceiling, however, did create some temporary ripples in the short-term Treasury market – see Figure 1.
With the possibility the U.S. might default on its debt, the 1-month T-bill saw its yield jump by 0.29 percentage points between September 30 and October 15, the day before the agreement was announced. The primary reason – the shortest dated maturities were likely to be the most affected by any default (even if the risk was always very slight), and money managers around the country decided to sell their short-term T-Bills and avoid any operational issues that might arise in the event of a delay in the repayment of principal and interest.
Because any breach of the debt ceiling was very likely to create unprecedented volatility and uncertainty in the global financial system, the brinksmanship and the game of chicken came to a close as the Treasury inched toward the debt ceiling, and an agreement between the warring parties was reached.
We continue to see stock prices and valuations stretching limits, and still believe a correction in the stock markets overall is well overdue. The higher the valuations and prices move, the potentially harder the fall at some point. We also expect to see interest rates continue to edge lower over the next several months, which would help push fixed income/bond prices higher. We remain underweighted for all risk levels in stocks/equities at this point, in continued anticipation of a stock market correction. If this does occur, we hope to take advantage of lower stock prices at some point in the future. We have made some adjustments to the individual stocks that are held in various risk levels, and will continue to monitor this on a regular basis. We will keep you advised.
The Economy and FED
Government Shutdown Effect on the Economy Appears Limited
In addition to various private sector entities that depend on government operations, the constant media barrage hurt consumer confidence – see Figure 2.
Consumer confidence has bounced modestly off the bottom. But a bigger question – will the steep drop in sentiment blunt consumer and business spending? The bruising debt debate in the summer of 2011, coupled with the downgrade of the U.S. triple-A rating by Standard & Poor’s, temporarily hurt confidence but its effect on spending was limited.
A CNBC survey in late October revealed that economists, strategists and money managers believe that on average, the shutdown shaved 0.3 percentage points off fourth quarter Gross Domestic Product (GDP – the largest measure of goods and services for the economy). More importantly, the CNBC survey detected a major shift in sentiment regarding the timing of any reduction in the Fed’s $85 billion in monthly purchases of longer-term Treasury bonds and mortgage-backed securities.
The Fed’s goal – lower interest rates and encourage businesses and consumers to borrow and spend, spurring economic growth and hiring. The Fed is also trying to inflate asset prices such as stocks and housing, hoping the “wealth effect” also encourages more spending. Only when the recovery is more fully entrenched will the Fed end its bond-buying program and begin raising short-term interest rates. For savers, that time can’t come soon enough.
Prior to the Fed’s October 30th meeting, a survey of economists and money managers compiled by CNBC revealed that the first reduction in Fed bond purchases might not occur until March 2014, five months later than September’s survey. The Fed’s statement that followed the latest meeting was almost a carbon copy of the September statement.
With a new Fed chair set to replace outgoing Fed Chief Ben Bernanke in 2014, any tapering is probably unlikely until next year. Further, inflation as measured by the CPI is low, and we’ve been seeing a gradual reduction in net job growth which has been a key goal for U.S. central bankers.
But the Fed is keeping the markets guessing as we get set for the holidays.
We hope you are all looking forward to the Holiday Season ahead as we take some extra time with family and friends to show our thankfulness and appreciation for each other and all we have in this life. We appreciate the privilege to serve each and every one of you and look forward to working with you in the years to come.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
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