also commentary from RBC wealth managements:
RBC Wealth Management
Michael D. Ruccio, AAMS
Senior Vice President -Financial Advisor
michaelruccio.com
Market Week: October 7, 2013
The Markets
The Washington impasse continued to take its toll on the Dow industrials, which fell for the second straight week. However, the S&P 500 ended the week essentially flat despite some volatility, while the Nasdaq and small caps of the Russell 2000 managed to eke out slender gains. After hitting its lowest point in two months, gold rebounded roughly $34 before falling back slightly to $1,310 an ounce.
Market/Index 2012 Close Prior Week As of 10/4 Week Change YTD Change
DJIA 13104.14 15258.24 15072.58 -1.22% 15.02%
Nasdaq 3019.51 3781.59 3807.75 .69% 26.10%
S&P 500 1426.19 1691.75 1690.50 -.07% 18.53%
Russell 2000 849.35 1074.19 1078.25 .38% 26.95%
Global Dow 1995.96 2331.75 2325.73 -.26% 16.52%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 1.78% 2.64% 2.66% 2 bps 88 bps
Equities data reflect price changes, not total return.
Last Week's Headlines
The government shutdown left investors with more question marks than usual about the state of the economy, since reports from the Commerce Department, Census Bureau, and Bureau of Labor Statistics--all of which supply data on economic activity--weren't available. Worries about the economic impact of the shutdown began to merge with worries about whether an agreement on the debt ceiling would be reached in time to avert default on the nation's bills. A Treasury report warned that a default after October 17 could not only weaken the dollar and lead to a credit freeze as well as higher interest rates, but also could be worse than the 2008 financial crisis.
With government unemployment statistics unavailable, the Automatic Data Processing, Inc. jobs report (which covers only the private sector, not government jobs) assumed greater importance. According to the ADP survey, companies added 166,000 jobs in September. That's slightly better than the 159,000 jobs added in August or the 162,000 monthly average for the last three months, but much weaker than the 220,000 new jobs seen by ADP in January. Employment indices compiled by the Institute for Supply Management (ISM) for the manufacturing and services sectors also rose (see next item).
Growth in U.S. manufacturing activity accelerated in September as the ISM's manufacturing index hit 56.2%--the highest reading of the year and slightly better than August's 55.7%. However, the ISM's gauge of the services sector grew more slowly during the month. Though the index was at 54.4% and represented the 45th straight month of growth, that was lower than August's 58.6%. The ISM's index of manufacturing employment hit its highest level year-to-date, increasing to 55.4% from August's 53.3%, while growth in services employment slowed from 57% in August to 52.7% in September.
The European Central Bank kept its key interest rate at 0.5%, saying that lending in Europe remains relatively weak. ECB President Mario Draghi also warned that a protracted U.S. government shutdown could undercut global growth.
Eye on the Week Ahead
The Washington wrangling will continue to be the focus of investor attention, as little economic data may be available to influence markets. However, third-quarter earnings season gets under way with Alcoa's after-hours report on Tuesday, and the U.S. Treasury is scheduled to auction 3-, 10-, and 30-year securities on Tuesday, Wednesday, and Thursday. Minutes of September's Fed meeting could shed light on the likelihood of an "Octaper" of economic support.
Key dates and data releases: balance of trade (10/8); Federal Open Market Committee minutes (10/9); wholesale inflation, retail sales (10/11).*
Comments
Pay Attention to What's Missing
It's sometimes difficult to notice what's missing -- but as Sherlock Holmes observed when the dog didn't bark, what's missing can be as important as what's present. So what are we missing from today's investing landscape? Keep the following missing pieces top-of-mind:
Progress to reopen the government
A negative reaction from financial markets to these concerns
September jobs numbers
An agreement to raise the debt ceiling
Growth Slower, Then Stronger?
By now, we are all aware of the first two missing pieces mentioned above: the lack of progress to reopen the government and the financial markets taking the partial shutdown in stride. And the lack of any reaction is similar to many of the previous 17 government shutdowns, when stocks declined 0.9% on average. After those past shutdowns ended, stocks gained 13.3% over the following year.* We don't know what will happen this time, and past performance is not a guarantee of future results -- but we believe stocks appear attractive if appropriate for your situation.
If the shutdown continues for two weeks, it will reduce fourth-quarter economic growth by about 0.3% from the current projection of 2.1%, according to forecasting firm Macroeconomic Advisers. But we believe the pace of economic growth would be boosted in the first quarter of 2014. While the impact certainly isn't small for those directly affected, especially government and related workers who are furloughed, it isn't likely to push the overall economy into recession.
Without the government's data on the economy, especially the job market, the Federal Reserve is likely to leave its current bond-buying program in place for longer. And if the partial government shutdown is lengthy, it could delay any policy change until next year, choosing to continue to support the economy with low interest rates. So even if the economy appears to slow, we believe it's likely to be temporary. As a result, we think investors should be prepared, stay invested and look for possible opportunities.
Could the U.S. Default on Its Debt?
Don't forget about the last missing item in the bulleted list above: an agreement to raise the debt ceiling. Although Congress has not been able to agree to reopen the government, we continue to believe it will reach a last-minute agreement to raise the debt ceiling near the Oct. 17 deadline set by the Treasury. The U.S. has the resources to pay its debts, but it won't have the cash available to pay the bills unless the debt ceiling is increased. And non-payment would be unprecedented.
The debt ceiling has been increased 79 times in the past, starting in 1950. There was essentially no market reaction to 78 of the 79 increases.** But in August 2011, when Congress waited until the last minute to raise the debt ceiling, stocks dropped more than 15%. In addition, the credit rating agency S&P downgraded its rating on U.S. debt from AAA. Stocks were up 12% six months later, and up 16% a year later.*** While we hope Congress will act sooner to avoid any replay of the negative market reaction, we think investors need to be prepared.
What Could You Be Missing?
Stocks have pulled back slightly from their record highs, warily eyeing the budget dilemma and the approaching debt ceiling deadline. Don't let the Washington worries unravel your long-term financial strategy. Prepare by reviewing your investments, and make changes if needed.
Do you have an appropriate amount in stocks?
Do you have some international equity investments?
Do you have an appropriately diversified bond portfolio with a variety of different maturities?
Do you have enough in cash?
An appropriately structured portfolio can help you stay calm, invested and able to act on appropriate opportunities despite possible brinkmanship in Washington.
Shopping list : MXXVX (buy again of course), SEEDX, GOODX, and FMIOX reincarnate.
I think once the current mess in Washington abates, it will be back to the slow growth to which we have become accustomed.