A Macro View
It was an eventful week in the financial markets, resulting from the agreement reached in Washington to end the debt standoff and government shutdown. The framework negotiated by Senators Harry Reid (D – NV) and Mitch McConnell (R – KY) provides for funding of federal agencies at current levels until January 15, and will allow for continued government borrowing through February 7. The deal also includes provision for a budget negotiating committee tasked with developing plans for long-term fiscal solutions.
While a debt crisis has once again been averted at the 11th hour, as has been its recent history Washington only “kicked the can” down the road, and we will be confronted with the need to again raise the debt ceiling and deal with fighting over sequestration in early 2014. In addition to renewed budget negotiations at that time, the markets will also be paying close attention to the transition to a new Federal Reserve chairperson (President Obama has nominated Janet Yellen to the post) as well as the implications of potential tapering of the Fed’s quantitative easing (QE) program. One potential positive for future debt ceiling negotiations is that brinksmanship may be less likely due to the significant drop in approval ratings over the past several weeks for both the House Republicans and President Obama.
The equity markets also were encouraged by third quarter earnings results. Some large well-known companies such as Google, General Electric and Morgan Stanley all reported earnings that exceeded analyst expectations. Google’s stock rallied sharply today, with the company’s share price now exceeding $1,000 per share. Of the 100 S&P 500 companies that have reported so far this quarter, the average earnings growth has been 4.4%, while sales grew an average of 2%. The materials sector has been the most robust, with four companies reporting an average growth rate of 32%. Earnings overall have exceeded analyst expectations by about 4%, while sales have been slightly below expectations.
Markets are also looking ahead to the release next Tuesday (Oct. 22) of the September employment report, which was due to be released on October 4 but was delayed due to the government shutdown. According to Bloomberg, the consensus expectation among economists is that 180,000 jobs were added in September, while the unemployment rate held steady at 7.3%. A slew of additional data that had been delayed is slated to be released next week as well.