S&P Sectors year to date through 10/25/13

Estimates total government shutdown costs to the US economy at $24 billion, about .6% of annual gross domestic product.  And although the standoff was resolved with a provisional agreement to raise the debt ceiling and pass a funding bill through February and January 2014 respectively, it’s hard to feel relieved that the showdown between lawmakers is over – because it isn’t.  Despite this negative overhang, markets like to focus on the here and now so the current preoccupation is company earnings.

A good year to be an equity bull – a top down perspective

Since the October 17th resolution, markets have quickly rebounded and Bloomberg notes that the equity market is up 24% year to date.  Positives include:

  • Company earnings have been generally favorable to support a continued stock rally.  Strategists are predicting that an expansion in price-to-earnings multiple may propel the next advance.
  • Investors are seeking risker areas of the market to drive gains.  Small cap stocks, generally a proxy for economic expansion, are outperforming large cap stocks by about 6% year-to-date.
  • Sectors with high proportion of overseas earnings – such as Technology and Materials –  are perking up from last year’s malaise as Europe emerges from recession, China appears to have stabilized, and select emerging markets are serving middle-class consumers, think Mexico.  Anecdotally, I recently spoke with a strategist who extolled investment opportunities in Ireland and Spain financials, recently considered areas to avoid.  And Abe-economics has stoked the Japanese market to outsize gains around 38%.

Tricks – or a mixed goody bag for consumers

As the chart above shows, consumer discretionary stocks have outperformed all sectors this year, attesting to investors’ desire for homegrown earnings and the resilient forces of the American consumer.   With consumer spending accounting for roughly 70% of US gross domestic product, consumption is a key component measuring economic health.  What’s worrisome is that post shutdown, reported data has been soft. Is this a temporary blip or a sign of things to come?  With economic growth below trend, there is a potential for the economy to falter rather than ramp up.

  • Consumer sentiment declined more than expected to the lowest levels of 2013
  • Job growth – problematic since the recovery – is tepid
  • Housing, a bright spot all year, is starting to falter due to rising interest rates. As housing prices exceed wage growth, refinancing slows.  Post recession, housing ownership is down.
  • Consumer net worth, while up (due to housing) masks wage declines.  Nevertheless, spending is up while savings are down.

Assuming a temporary blip, what could drive the market higher? 

Next month’s readings should demonstrate if recent data has been a short-term reflection of the shutdown or lingering weakness.  Until the direction becomes clear, further advances in the stocks market may disappoint investors.


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