By David Nelson, CFA
Equity markets pushed higher last week despite the prospects of a government shutdown on Friday. Right on cue the Elephants and the Donkeys failed in their mandate as the Washington Circus came to a screeching halt. It’s unlikely it will last for any length of time but with each day that passes the cost to the economy mounts. For the moment both sides will likely spend more time in front of the cameras and microphones pointing fingers but at some point the public will demand a budget or at least another CR (Continuing Resolution). One blog examined the S&P 500 performance during previous U.S. government shutdowns showing mixed results. The last one in 2013 under then President Obama gave stocks a +3% bump.
Shutdown Equity Performance (No idea if this is accurate)
Lost in the rhetoric is an earnings season that is just underway. To date, it has largely been the financial sector making the most noise and for the most part I would call the results in line. The tempo picks up this week with heavy weights Johnson & Johnson (JNJ), Netflix (NFLX) and United Technologies (UTX) just a few of the Fortune 500 scheduled to report.
Every company will have something to say about the Tax Overhaul with almost all pointing to a long term tailwind for earnings. Some like Goldman (GS) last week may be forced to take a charge due to deferred tax assets or some other one time item but most should see a benefit as the year unfolds.
Aside from S&P Earnings slowly inching higher economists are starting to increase GDP estimates. For the moment the changes are small but that could easily change as the year unfolds.
While equity markets around the world continue their bull market run balanced accounts are seeing asset classes pulling in opposite directions.
It has not been a good start for fixed income as well as most interest rate sensitive stocks like Utilities. Bond investors have been getting a double whammy with Fed rhetoric indicating they will continue on a normalization path while the longer end of the curve breaks above critical resistance.
10 Year yields closed close to 2.66% on Friday breaking above resistance bond guru’s like Jeff Gundlach called a line in the sand.
With commodities and energy moving higher along with strong employment and for the first time in decades wage increases investors are starting to factor in the potential for inflation. We’ve seen this movie before and each time some negative data point sent investors back to the so called safety of bonds.
However, with geosynchronous growth around the world along with an accelerating economy, at home the potential for increasing pressure on interest rate sensitive assets bears watching.
*At the time of this article some funds managed by David Nelson were long SPY, TLT, TIP & VEU