This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

David Joy: Muted market reaction to the government shutdown

 

Throughout the trading day on Tuesday, the first day of the federal government shutdown, investors responded with a resounding “ho hum.” The S&P 500 ended the day up 0.8% to close at 1,695.02. The trend reversed on Wednesday, with stocks trading lower as the shutdown received more attention, but the overall reaction has been relatively subdued.

This response is not likely because investors are unaware of the vital role the government plays in all of our lives, and the hardship a shutdown of even limited duration will cause some, but more likely because they have seen this movie before, and recognize it for what it is: a political sideshow that is one of the less agreeable aspects of our form of government.

Find out what's happening in Bronxville-Eastchesterwith free, real-time updates from Patch.

It has played out many times before and will undoubtedly play out many times hence. But, like a bad movie marathon on an obscure cable television channel, the longer it persists, the more irritated we will all become, and wonder what we are getting for our money. (Note: For a brief history on the federal government shutdown of 1995/1996, read Russell Price’s Sept. 30 Commentary.)

A shutdown that lasts for a few days will soon be forgotten. But one that persists for a few weeks will begin to have a meaningful impact on the economy, in which case investors and ordinary citizens alike will not be as sanguine as they seem currently. And that attitude may turn downright belligerent should the shutdown drag closer to the debt ceiling deadline mid-month. And given the new reality of the shutdown, the folks at the Federal Reserve are probably happy they chose not to taper at last month’s meeting.

Find out what's happening in Bronxville-Eastchesterwith free, real-time updates from Patch.

At least for now, however, investors are operating under the assumption that the shutdown is likely to be short-lived, with few, if any, lingering effects. All ten sectors of the S&P 500 moved higher on Tuesday, led by healthcare on the first day of the new quarter and the first day of functionality, at least for some, of the insurance exchanges created by the Affordable Care Act.

Manufacturing outperforms expectations
Investors were greeted with better than expected economic news to start the quarter, as the ISM report on manufacturing rose to its highest level since April 2011. Manufacturing also expanded for the third straight month in the Eurozone, and strengthened modestly in China.

The better tone in equities is resulting in some modest upward pressure on bond yields. The ten-year Treasury note yield is higher by four basis points at 2.65%. Expectations of Fed tapering had pushed its yield to 2.99% on Sept. 5. Since then, it has fallen steadily, bottoming at 2.61% on Friday.

The government shutdown will begin to create a problem for investors as the release of government-sponsored economic data is delayed. The first real hardship in this regard may come on Friday with a possible delay in the release of the September employment report.

Taking stock of the third quarter
The third quarter was favorable for equity investors. The S&P 500 doubled its return of the second quarter with a gain of 4.7%. The NASDAQ had its best quarter since the first of 2012 with a return of 10.8%. The Russell 2000 returned 9.9%.

Overseas, the Japanese Nikkei index returned 6.9%, the MSCI European index was among the best performers with a return of 13.2%. The Japanese Nikkei index returned 6.9%, while the MSCI Emerging Markets index rebounded with a return 5.3%, after two consecutive down quarters.

The period was not as friendly for bond investors, although not nearly as bad as the second quarter. Fed fears resulted in ten-year U.S. Treasury note yields rising from 2.49 on June 30 to 2.61%. The B of A/ Merrill Lynch High Yield Master II index returned 2.2%, while the AAA U.S. Treasury/Agency Master index was virtually flat. And after an abysmal second quarter, commodity prices rebounded, as the Dow Jones UBS Commodity index delivered a 2.2% return.

Aside from the government shutdown and potentially more problematic debt ceiling debate immediately ahead, equity investors are focused on the pace of economic activity and corresponding corporate earnings growth. Third quarter earnings season begins next week. Forward expectations assume at least some acceleration in economic activity, but the margin for error has diminished with stocks arguably fairly valued at present. With at least some recent evidence of a budding global rebound, there is a chance the economy could be strong enough to deliver the consensus earnings growth needed to push stocks higher. Should the government shutdown in the U.S. drag on indefinitely and jeopardize growth expectations, however, stocks might need to adjust to lowered expectations. And the Fed can forget about tapering at its October meeting.


Disclosure

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.

The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.

The Russell 2000® Index is a market-capitalization-weighted index made up of the 2,000 smallest US companies in the Russell 3000.

The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.

The Bank of America Merrill Lynch AAA US Treasury/Agency Master Index measures the performance of Treasury and agency bonds.

The Dow Jones-UBS Commodity Index℠ is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME).

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2013 Ameriprise Financial, Inc. All rights reserved.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?