The US Markets had a slight pullback in the final week of the month, but finished October overall with solid gains. The highlights of the month were once again centered on politics and the Federal Reserve.
The global economy collectively breathed another sigh of relief on October 16th. With less than 24 hours before the U.S. Treasury would have run out of borrowing room, Republicans and Democrats struck a deal that ended the 16-day government shutdown. The legislated debt ceiling was also raised as part of the agreement, averting a potentially catastrophic default by the U.S. government.
The outcome was largely expected as it follows in a long line of 11th hour deals in the last few years. Unfortunately (though, not surprisingly), this deal does not outright remove the specter of political uncertainty. The can has just been kicked down the road, again. The new continuing resolution only funds government operations through January 15th, while the debt ceiling was only raised through February 7th. In addition, part of the deal included an agreement that both parties would form a bipartisan committee to address fiscal issues before December 15th. In other words, politicians are likely to again be mired in similar negotiations over several months beginning in just a few weeks. Hopefully, these debates will be less divisive than in the past – though if recent history is any guide, this is unlikely.
U.S. stocks resumed their positive streak in July (after a slightly negative June). Large-cap stocks rose in three out of the four weeks and were up 5% for the month. Smaller companies generally outperformed their larger-cap counterparts. After Federal Reserve comments regarding the timing of its stimulus withdrawal upset markets in May and June (particularly the bond market), investors seemed to take comfort in the Fed’s more recent comments. Among other points, Chairman Bernanke reiterated that a decision to taper bond purchases is different from raising the federal funds rate. While the former may begin as soon as this Fall—if economic data continue to show improvements in growth and employment, amidst subdued inflation—a decision to raise rates would still be much further out, likely occurring after unemployment dips below 6.5% assuming no serious inflation concerns.
U.S. stock markets also digested economic data that by and large showed a continuation of weak economic growth buoyed by a strengthening housing sector (despite a recent increase in mortgage rates), and a slowly improving employment picture. Corporate earnings season got underway as well. While we don’t put much (if any) stock in the short-term earnings game, the data does suggest a slowdown in the rate of earnings growth in recent quarters, a trend that doesn’t surprise us given the generally tepid level of global economic growth.
Source: Chladek Wealth Management