As you have probably heard by now the folks in Washington DC did what they do best – wait until the very last minute and then just extend the deadline. Basically they have reopened the government until mid-January 2014 and increased the debt ceiling until mid-February 2014. The reason for the mid-January 2014 date is to try to force a budget agreement (the US hasn’t had an actual budget in over 5 years) before the next round of mandatory budget cuts as part of the sequester that was implemented back in the summer of 2011 (the last time we faced this same situation). The structure of the agreement also allows the Treasury Department to continue to use “extraordinary measures” which will likely extend the debt ceiling beyond mid-February. (note: technically the debt ceiling was hit back on 5/19/13 but these “extraordinary measures” allowed the Treasury to operate until 10/17/13)
Since last Thursday, a relief rally has occurred in the equity markets. However, I wouldn’t be surprised to see a “buy the rumor, sell the news” pullback now that a deal has been struck.
So now the financial markets will again focus on truly important things like economic growth and corporate earnings. On the economic front, the 16-day government shutdown is estimated to have cost the US economy $24 billion as per Standard & Poor’s. However, on a Gross Domestic Product of almost $16 Trillion that is fairly insignificant. What is more important is the damage this episode has caused to sentiment and confidence, especially among consumers. Third quarter 2013 earnings season started last week and so far earnings results have been mixed, with some important companies like American Express & Verizon beating estimates and some like IBM & Goldman Sachs missing estimates. My sense is that earnings overall may be somewhat disappointing.
In summary, I feel that we will likely see a pullback in the equity markets on the order of 5% to 10% near-term but then a move higher into year-end. On the fixed income front I expect interest rates (basis US 10yr Treasury) to remain in the 2.4% – 3.0% range for the foreseeable future.
I hope you find this update useful. Please feel free to call me with any questions or concerns.
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