10/15/2013 5:00 AM ET|
After the shutdown, a big rally?
Assuming the shutdown ends without disaster, investors can expect a rally into December. But then old worries, like China and the Fed, will creep back in.
It’s hard to take your eyes off the government shutdown/debt ceiling crisis in Washington for the same reason we rubberneck at a car crash:
Disaster is fascinating.
But let’s pry our eyes away for the moment and look further down the road.
Assuming this crisis does get resolved short of financial Armageddon -- and I think it will, although probably only after a close call with a U.S. debt default badly rattles global financial markets -- then what?
Let me try to look ahead at the rest of the year and into 2014 to see what’s likely to happen in the markets.
First, and I think we’re all agreed on this, we get a relief rally whenever this mess is over. (Of course, this almost universal belief in a relief rally may be the reason stocks haven’t fallen very far and that the markets haven’t created very many bargains.)
Ready for the rally?
We’ve already seen a good example of this at the end of last week, when optimism that the White House and House Republicans were close to a deal soared. We got a very impressive 2.2% rally in the Standard & Poor’s 500 ($INX) on Thursday, Oct. 10, and a decent follow on of 0.63% on Friday, Oct. 11.
Those markets and stocks that had been hit harder by fears of a U.S. default and by the consequent flight to safety rebounded even more strongly than the U.S. markets. This was particularly true for emerging markets, which had suffered their usual relatively larger decline when fear increases among investors -- even when these countries aren't the source of the fear. The iShares MSCI Indonesia ETF (EIDO), for example, rose 3.6% on Oct. 10. The iShares MSCI India ETF (INDA) climbed 3.2% and iShares MSCI Turkey ETF (TUR) was up 2.8%.
How long the relief rally runs and how big it is depends on how quickly the economic fears that were preying on the market’s mind return to the front of investors’ thinking. Remember back before the U.S. budget and debt ceiling crisis? The fears then were 1) how slow growth might get in China, and 2) the U.S. Federal Reserve's inevitable move to begin tapering off its $85 billion in monthly purchases of U.S. Treasurys and mortgage-backed securities?
Rally killer No. 1: China doubts
Over the weekend, China’s government announced that exports unexpectedly fell in September. Exports dropped 0.3% from September 2012. Economists surveyed by Bloomberg had expected 5.5% annual growth in exports. In August, exports had climbed at a 7.2% annual rate. (Imports climbed 7.4% in September, more than economists had forecast.)
The worry, you’ll remember, is that China’s economic growth will fall below the government’s target rate of 7.5% for the year. Last week China’s Premier Li Keqiang said that China’s GDP had grown by more than 7.5% in the first nine months of 2013.
It’s unlikely that China’s official data will show any deviation from the government’s goal in the run-up to the November meeting of the Communist Party’s Central Committee that will set economic policy and discuss how to integrate the country’s economic policy and socialism with Chinese characteristics. The official data is extremely unlikely to rock the boat before that meeting, but whether or not that data is reliable is another question. And if it isn’t, the true growth rate of the Chinese economy will show up in the performance of the global economy whatever the official Chinese numbers say. A forecast that China’s growth will miss the government’ target was a key reason that the International Monetary Fund cut its projection for global 2014 growth to 2.9% in 2013 and 3.6% in 2014 from a July forecast of 3.1% in 2013 and 3.8% for 2014.
On the evidence of what happened earlier this year when fears of lower-than-expected Chinese economic growth hit emerging markets hard, I think a return of those fears would cut into any emerging market rally. Worries about the speed of China’s growth would also put downward pressure on commodity economies and their stocks as well and could revive doubts about the speed of any economic recovery in the eurozone.
Rally killer No. 2: The Fed's next move
Second, at some point markets go back to trying to predict when the Federal Reserve will begin its taper. Markets moved up very strongly in September as the markets increasingly convinced themselves that the U.S. economy was weak enough and the situation in Washington uncertain enough to put off any taper on the Fed’s asset purchases into October or later.
This view that was vindicated when the Fed surprisingly didn’t taper at its Sept. 18 meeting.
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Why is everyone constantly discussing short-term rises and drops in the stock market as if they actually matter? I understand the short news cycle, but this is insane. Our nation has done nothing to address the serious issue of our $17,000,000,000,000 national debt. Until this is addressed, there is no real reason for optimism in our economy. Once interest rates start to rise to attract REAL Treasury Bill buyers after the Fed finally stops fluffing-up the markets with $85 billion in purchases monthly, our economy will be in a serious long-term mess. Even with interest rates at historic lows, our nation paid $360,000,000,000 last year in interest on the debt. Rates could easily rise to 6%... and perhaps much higher. At 6% our annual interest payments will be about $1,000,000,000,000 a year in interest only. Since our government only takes in $2,700,000,000,000 in taxes a year, this means interest on the debt could easily be 37% of this and this guarantees a bad recession. And, GOD FORBID, if interest rates spike up like 1979-81 to the 12-14% range... then about $2,000,000,000,000 a year could be paid in interest only.., and this number will be higher if we continue to borrow another $1,000,000,000,000 a year until then. At that point we will be in the worst Depression EVER... because there is no way to pay this interest without massive tax increases AND massive spending cuts. All of this because our government is too stupid to make the hard decisions now, and all because our citizens are too ignorant and mathematically stupid to demand it! Sorry, but I see no reason to cheer anything in our economy.
If the stallmate continues, and this leads to a crash in the economy, and the stock market, it will takes years to recover. The stock market crash of 1929 and the great depression lasted about 10 years.
Theorem: The stock market people believe in anything and everything that might make their over-valued stocks go up short term. Hence they believe in: Big rally after the shutdown, Commy China's propaganda statistics, USA propaganda statistics, money printing and more deficits, job shipping to overseas and "free trade", gutting the middle class, and Santa.
The news out of China and Japan isn't good. Euro-Zone high unemployment still a major Problem. American Consumers should have been tapped out a long time ago. Most of the BRICK Nations including China aren't doing so Well.
Of course, with all the Funny Money floating around, who freaking can really guess anymore what might happen near term. Longer term, it's a done deal, Epic Fail.
economic health and the rise of the stock market have anything to do with a government
I do not understand why no one is addressing what the current earnings season reporting could do to the rosy predictions of an end of year rally. P/E are already at the point of being worrisome to me and the current earnings reports are certainly not going to improve the valuations to earnings.
The 2nd impact is what this bickering and partial shutdown will do to earnings for quarter 4 and for retail sales for the holiday season.
Am I the only one believing these factors are going to be negative drags on the markets?
"" The house will not go along with any debt ceiling measure that does not slash spending or reopening the government with Obamacare funded.""
So.. you don't want raise the depbt ceiling? Maybe we can return those two wars and get our money back.
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[BRIEFING.COM] S&P futures vs fair value: -4.30. Nasdaq futures vs fair value: -9.30. The stock market is on track for a lower start as futures on the S&P 500 trade four points below fair value.
Index futures have retreated from their overnight highs following another round of disappointing data from China. This time, it was the Foreign Direct Investment report, which revealed a 1.8% decline (previous -0.4%), leading to concerns about a potential hard landing.
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