Market Bulletin on the Looming Shutdown
Today, 9/30/13, the U.S. stock market is down but well off the lows set in the first half hour of trading. The best interpretation of the market’s relative calm is that it believes that the threat to shut down the government will not result in a protracted shut down of the government. Observers think that the White House believes it holds a winning hand:
- Obama has no elective office to seek ever again, while every member of the House has an election in 13 months. The vast majority are from very safe districts, but you never know.
- The business community, upon whom both sides rely on for campaign funding, are largely against a shut down.
- There are no natural points of compromise for the Democrats. Either you fund Obamacare sufficiently to give it a chance to success, or you don’t. They aren’t going to agree to any partial measures.
Obviously, anything may happen. Perhaps the market is being too optimistic. But traders have two things in mind:
- Selling on the basis of political uncertainty has been a big loser over the past two years. Remember the sequester sell-off in late December 2012? Just another buying opportunity.
- Market leadership has been with the cyclically sensitive companies for the last few months. That hasn’t changed recently. Absent the political crisis (which could go away at any moment), the uptrend was technically rather solid.
Anybody doing longer term analysis of the stock market knows that current prices are fairly rich, and long term returns from here are likely to be well below the historical rate of 9-10% annually. That said, valuations almost never drive stock prices in the short run. Some more general market observations:
- Treasuries have outperformed high yield bonds by 3% since September 10th. At this point, we have to treat that as an oversold bounce.
- Emerging markets liked the (non)taper news, but continue to underperform developed market stocks.
- Small cap stocks are holding up better than midcaps, which are in turn doing better than large caps stocks.
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