For the second week in a row, the markets ended up at almost exactly the same place or higher then they started. Despite the shutdown, the debt ceiling and the market sell-offs they have induced, the markets are telling us to ignore this drama.
“The federal shutdown and the debt ceiling will be lifted,” was the headline of last week’s column, and nothing that has happened this week has changed my mind. Through the week I actually put some money to work on the down days. On Thursday a perceived “thaw” in partisan positions on the debt ceiling triggered a 2.18% gain in the S&P 500 Index and 323 points on the Dow. It was only the second time this year the S&P gained 2%. By Friday, it looked like a deal was in the offing and the markets rallied further.
The GOP’s willingness to soften their demands may have had more to do with recent opinion polls than with ideology. The Republican Party has been damaged, according to an NBC/WSJ poll (among others), by their willingness to shut down the government and precipitate a global meltdown by refusing to extend the debt ceiling. Not that the Democrats have gone unscathed. Their unwillingness to even discuss issues until after the shut -down and the debt ceiling are lifted did not leave even moderate Republicans much wiggle room.
So what happens next? My guess is that they kick the can down the road and pass some kind of short-term compromise. The debt ceiling will be raised for a couple of weeks while both sides negotiate over spending cuts. I also think the government will reopen, even though some tea Party Republicans want it to remain closed as added pressure on the Democrats to negotiate.
Worst case: what it will mean for investors is an added period of political uncertainty ending in yet another agreement in November that will solve little to nothing. It will allow the government to limp along under stop-gap measures while politicians continue to benefit from free publicity, national attention and additional campaign contributions. Welcome to the land of the ungoverned.
In the meantime, third quarter earnings season has started. I’m not looking for many upside surprises, given the negative impact the Sequestration has had on the economy. I also don’t see many upbeat forecasts for future earnings due to this on-going political uncertainty.
But it is my belief that none of this matters beyond some short-term market volatility. The appointment of Janet Yellen to succeed Ben Bernanke as chairperson of the Federal Reserve Bank is by far the most important thing to happen this week for investors. She was my first choice for the job and is “dovish” with respect to the need to keep the Fed’s quantitative easing program in place until things get better.
When was the last time you heard the word “taper?” Three weeks ago that’s all you heard in relation to the future of the stock and bonds markets. Given the slowing economy, the shutdown of government and the debt ceiling uncertainty, any tapering of the Fed’s stimulus program has been postponed until next year, in my opinion. .That is why you should stay bullish on the stock market.
As long as the Fed keeps easing, the stock market will continue to go up. As I have been saying all year, stay invested. Don’t let these minor pullbacks in the market spook you. These binary events (and there will be more) are just excuses for the market to consolidate before climbing higher. It’s simply the traditional “two-steps-forward, one step-back” kind of bull market.