Resilient Markets, Indecisive Politicians

Debt showdown averted, for now

by Kenneth Leach, Steve Selengut, Matthew Melendy & Amie Snyder

LMK Wealth Management

 

Markets closed out another positive week, shrugging off lackluster consumer confidence and moderate earnings reports to hover around multi-year highs. For the week, the S&P 500 gained 0.95%, the Dow gained 1.2%, and the Nasdaq gained 0.29%.

In Washington, Congressional Republicans backed off from a debt showdown against a resolute President Obama that could have risked a government default on debt. Republicans said they were prepared to raise the debt ceiling and allow the federal government to borrow operating expenses for the next three months, kicking the fiscal can further down the road.

To be frank, we’re frustrated with Congress’ inability to make hard choices about spending and debt. Allowing the U.S. to fall into default would be catastrophic, given that the world treats U.S. government debt as essentially default risk free. Despite their promising rhetoric to use the debt ceiling debate to force widespread fiscal reform, many politicians seem to have abandoned that position in favor of baby steps.

Federal Reserve Chairman Ben Bernanke spoke on Monday, showing support for the fiscal cliff deal reached on January 1, but emphasizing that lawmakers still need to come to an agreement over the debt ceiling. The chairman also claimed that the Fed’s unusual December move to tie monetary policy to unemployment and inflation targets was designed to provide financial markets with greater clarity.

Earnings reports show that the final quarter of 2012 ended well, with many firms reporting better-than-expected (but not mind-blowing) results. However, business leaders are still cautious, noting that the debt ceiling debate and uncertainty over potentially higher corporate taxes clouds their 2013 outlook. On the positive side, many firms are bullish on the U.S. economy and are confident that trends show an ongoing recovery.

In a rare confluence of events, Monday was both a national holiday and the inauguration of President Obama’s second term, starting the week off fairly quiet for markets. There will also be relatively few economic reports released this week, meaning that traders will turn their attention to remaining earnings reports from firms like Google (GOOG), Starbucks (SBUX), and McDonald’s (MCD). Investors will also be paying close attention to new reports about the strength of the housing market, which are widely expected to show a continued recovery.

ECONOMIC CALENDAR:

  • Monday: U.S. Markets Closed for MLK Holiday
  • Tuesday: Existing Home Sales
  • Thursday: Jobless Claims, PMI Manufacturing Index Flash, EIA Petroleum Status Report
  • Friday: New Home Sales

Performance:

Earnings reports show that the final quarter of 2012 ended well, with many firms reporting better-than-expected (but not mind-blowing) results. However, business leaders are still cautious, noting that the debt ceiling debate and uncertainty over potentially higher corporate taxes clouds their 2013 outlook

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, MSCI Barra, Treasury.gov. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

Headlines:

Greece may need 10 billion euros

According to the International Monetary Fund (IMF),Greece may face a significant funding gap between 2015 and 2016, which will need to be filled by its European funding partners. This discovery may pour cold water on hopes that Greece may fully recover in 2014.

U.S. market ‘Fear Gauge” drops

The market’s so-called fear gauge, the Chicago Board Options Volatility Index (VIX), dropped to a five-year low as traders lost their fear of a debt-ceiling showdown. Historically, a high VIX indicates turbulent markets; contrariwise, a low index indicates that traders do not expect troubling news ahead. A low VIX may also indicate that a market reversal is coming soon.

Armstrong admits to doping

Cycling legend and seven-time Tour de France winner Lance Armstrong comes clean to Oprah Winfrey and confesses that he doped throughout his cycling career. His admission comes after years of denials and may open the door to both a deal with U.S. cycling officials (to allow Armstrong to compete again) and to lawsuits from those such as former teammate Floyd Landis whom Armstrong attacked in years past.

January consumer confidence report disappoints

A preliminary reading of the Michigan/Reuters Consumer Confidence index showed that confidence dropped for a second month, driven to the lowest level since December 2011 by fiscal cliff fears. While the news is a disappointment, it’s likely that optimism about the fiscal cliff deal may be captured in next month’s report.