What shutdown? Worry about this instead

Ultimately, the outlook for third-quarter earnings should concern investors. And there's good reason to be anxious about the rest of the year.

By The Fiscal Times Oct 1, 2013 4:05PM
Image: Worried couple (© Digital Vision/Getty Images)By Suzanne McGeeThe Fiscal Times logo

As the clock ticked down to midnight Monday night, the attention of most professional investors was fixed firmly on the prospect that Congress would -- as it did -- fail to hammer out some kind of compromise that would forestall a shutdown of government offices and services.

There has been a lot of saber-rattling and brinksmanship in Washington in recent years. So much, indeed, that it may be startling to realize this is the first time a shutdown has materialized since 1996.

Little wonder that in spite of all the anxiety in the headlines, financial markets seem fairly complacent. Accustomed to deals being struck at the 11th hour and 59th minute, and aware that even the sequester that came into effect curbing government spending hasn’t derailed the economy, markets wrapped up September with a healthy gain. The Standard & Poor's 500 Index ($INX) ended the month up nearly 3%, giving investors a year-to-date gain of 17.9% (or 19.8% in total return).

That very fact signals a different kind of risk, however. It's the risk of complacency: The headwinds that stocks have encountered have made this year a bumpy one for investors, but the long-term trend has been higher and higher. Oct. 1 may be a date that changes that. Certainly, it’s a date that stands out as a kind of red line, and not just because of the government shutdown. That’s just one of the issues with which investors will have to grapple in the final quarter of the year, and it may not even be the most serious. A fresh batch of earnings announcements will be coming soon.

That isn't to suggest, of course, that a government shutdown -- or the prospect of another full-scale Congressional battle in only a few weeks' time over the need to raise the debt ceiling yet again -- is anything to view with equanimity. From a market standpoint, stock performance during shutdowns has been hard to read.

Over the 21 days that the government ground to a halt in December 1995 and January 1996, stock markets and the dollar were largely flat. During the longest shutdown prior to that period -- 18 days, all the way back in September 1978 when the Democrats controlled Congress -- stocks tumbled 2%, and a 12-day shutdown in 1977 left markets 3.18% lower. That said, it's hard to argue that it was the shutdown that was responsible for those declines: The U.S. economy was troubled during the late 1970s, and relatively healthy in 1995, a fact that may have proved more important to investors than the shutdown.

The aspect of the shutdown that should rattle investors' nerves is how rating agencies and global investors will respond. An increase in borrowing costs or a decreased willingness to invest -- directly or indirectly -- in a political system that seems to lurch from one such governance crisis to the next can’t help but take a toll on the dollar, bond markets and stocks. Americans may be scathing about the difficulties the European Union has in generating a consensus about how to tackle its fiscal problems; perhaps we, in our glass house, should refrain from throwing bricks of that kind around.

While the shutdown will dominate headlines, the significance for markets at this stage is more a matter of emotion than substance. What may end up mattering more to stock prices -- even if it is less packed with drama and generates fewer banner headlines -- is the fact that Oct. 1 also marked the start of a new quarter. In only a few days, we'll begin to see a stream of corporate earnings announcements.

While corporate profits are still growing, they are doing so at a lackluster pace: Thomson Reuters expects third-quarter earnings to rise 4.6%, while revenue growth has been slower still. That means that many companies still are relying on cost-cutting to generate earnings growth.

That's why, ultimately, it's the outlook for third-quarter earnings that you should really be worried about -- and indeed, a reason to be a little more anxious, if not downright fearful, about what October and the remainder of the calendar year has in store for us. We're sitting atop a stock market gain of nearly 18%, something that few market pundits would have predicted at the beginning of 2013. All things being equal, at this level and at these valuations -- the S&P 500 is now trading at nearly 15 times next year’s earnings -- the risk of a selloff is greater than the odds of another big rally.

The volatility index, or VIX, that measures the level of investor anxiety or fear may have risen sharply yesterday to 16.8, but that’s well below the level of 48 recorded back in 2011, when Congress was locked in an equally furious battle over the debt ceiling. It’s also nearly 19% below its long-term average, telling us that investors are more in danger of being overly complacent than excessively bearish, the Washington drama notwithstanding.

To the extent that the prospect of a shutdown has long-term significance for the stock market, it lies in the prospect that the lawmakers’ inability to implement sensible fiscal policy could end up taking a toll on earnings by harming economic growth. That isn’t going to show up immediately -- indeed, the odds are that even a prolonged shutdown might not put a dent in earnings until sometime next year. But even if once again Congressional policymakers manage to pull off a last-minute solution to the immediate problem, there are reasons to be wary about the market at its current valuations, and to view any relief rally with wariness.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

More from The Fiscal Times


123Comments
Oct 1, 2013 4:26PM
avatar

Another Crisis! And soon the Debt Ceiling Crisis will follow. And then another Crisis and another...

 

What we got is an irresponsible Congress and hopelessly incompetent President drawing Red Lines and doing nothing.

 

No one is concerned about the country and their only concern is getting re-elected to a cushy job with too many benefits while the POTUS worries about his next really big vacation.

 

Vote them all out!

Oct 1, 2013 4:30PM
avatar

Brutus625:

 

Yea life is good here too! But our children and grandchildren are hopeless screwed as these schmucks in DC keep kicking the can down the road.

Oct 1, 2013 5:04PM
avatar

I for one am a fan of this shut down. We keep extending our debt limit and borrowing from China and Japan to pay for people in this society that stand there with their hands out. I'm not saying that everyone that gets some sort of financial assistance is not deserving but there are a huge amount of people that do take advantage of the system. I work damn hard for the living that I earn and have even taken second jobs to help pay for my child's medical needs and make ends meet. I have given up on the luxuries that many of us take for granted. Come on Uncle Sam! It's time to sell the boat, cancel the cable TV and start living  within our means both as a country and as individuals. If anything comes from this I hope that it's the federal government living within their means!

Oct 1, 2013 4:24PM
avatar
Nothing to worry about, really.  The gov shutdown isn't hurting anything - and it may actually be helping.  Congress will cave on the debt ceiling fight - no one will be stupid enough to push that red button.  And the federal reserve will continue full bore with QE.

The leaves are turning.  There's a football game on TV 5 nights a week.  All the harvesting is done.  The MLB playoffs are underway.  We're full bore into deer season and the fish are biting.  Life ain't half bad - get busy living, or get busy dying.
Oct 1, 2013 4:38PM
avatar
The shutdown shouldn't be the big worry, the free fall of household incomes should be. Merck just announced at least 8,500 layoffs and JC Penney outlets are letting another 1,500 go. Get ready for more reductions in payrolls and switching of workers from full to part time status. You can thank the present administration for giving you medical coverage in stead of a job or coverage you can't afford because you gross more than the allowable amount for a subsidy. How many are willing to work 2 or 3 part time jobs to try and make ends meet? Unfortunately this is the fate of many already. Reagan described this exact scenario in a speech he made describing how socialists would disguise their plot to control the population by way of healthcare and cast it as a humanitarian program. Go to youtube and search for Reagan Talks About Obamacare. Just listen!!!!
Oct 1, 2013 4:50PM
avatar
The Congress does present budgets - the Republican House has presented a budget and has passed the house every year since they have had control since 2011. Obama and the Democrat senate has not passed a budget going on 5 years now - even when they had control of the house and the senate in 2009 and 2010 - they were too busy passing Obamacare with absolutely ZERO republican votes - no input from representatives of nearly half the country. Obama has funded the government by continuing resolutions since he has been in office. The first president to never pass a budget in ANY of his years so far as president. He is a poor leader and hates governing. 
Oct 1, 2013 4:53PM
avatar
The more our government is shut down - the better. Maybe they can be shut down indefinitely. Just fund the basics and go home. 
Oct 1, 2013 6:03PM
avatar
As far as i'm concerned, the US government needs to stay shutdown...they are as useless as tits on a bull....nothing but idiots in Washington and they only pass laws to benefit themselves and NOT the american people.
Oct 1, 2013 5:05PM
avatar
When the Greek gov collapsed the market tanked but when the U S gov shuts down the market goes up?  Talk about manipulation?  When will the Dow really reflect the realities of our economy?  
Oct 1, 2013 5:18PM
avatar

The shut down is a result of the President's health care plan.  Period.    It is very noble to want to provide health care to everyone in the country.   But what is the cost.  I've heard $1.5 trillon short term.  Anyway it won't be free, and its probably the middle class employed person who will pay.  You can be sure it won't be the growing millions on some form of Government assistance, who likely voted Obama in.   So a Trillion $'s for health care and we're already $16Trillion in debt. Hmm.   

Brutus 625 is right about our children and grandchildren being hopelessly screwed.   However, he should have included so are the rest of us!

Oct 1, 2013 6:18PM
avatar
"I have come to the conclision that one useless man is a disgrace, that two are a law firm, and that three or more are a congress" - John Adams
Oct 1, 2013 6:10PM
avatar
New definition of "non essential personnel" - CONGRESS!
Oct 1, 2013 5:20PM
avatar

I would like to blame Paul Krugman, a post-Keynesian economist for much of this malaise.  Apparently the current administration listened to this person.

I've written to Mr. Krugman wanting to know why in God's name he thinks a nation should try to borrow more to get itself out of a debt crisis.  It sounds like a self-defeating venture.

After 15 months, I'm still awaiting his response -- I may write another.

 

Oct 1, 2013 4:42PM
avatar
But yesterday everyone was saying the market would tank if there was a shutdown.   Guess not.....sucka!
Oct 1, 2013 4:30PM
avatar

House Republicans will get their way in the end.

For they will also hold the Debt Ceiling debate hostage to get their way on the budget bill.

The Republicans have gone this far, they surely will not surrender to the Senate. Reid and the Senate Democrats have forced this government shutdown by not budging, not compromising.

The House has effectively instigated a bloodless coup d'etat upon the socialist stranglehold on America. 

Our Founding Fathers would be proud.

Oct 1, 2013 6:07PM
avatar
As Kobe Bryant might say, as far as the government shutdown goes I don't give a s**t!!!! The American people are far more resilient than the politicians and media types seem to think. 
Oct 1, 2013 6:54PM
avatar
I love how ever government shut down story has no comments allowed, so I will comment here instead. I love how one article claimed that it raises questions as to whether congress can do it's job. Nothing like loaded statements, they are doing their job; fighting for what they believe is best for the country. Even if they believe the way to get it done is not desirable.

Another rubbish headline says"Wall Street rebounds as government shutdown seen short-lived". Who believes for one minute if the market was down that the headline wouldn't have been something like "market down as wall street losses faith with congress" or something stupid like that. Maybe the market was up because they don't care? Or maybe the actually reality is that no moron reporter can actually knows "THE" reason the market is up or down since it encompasses millions of people making individual decisions. Saying that there is one singular reason that made people trade up or down is simply just crazy talk. Or propaganda take your pick.
Oct 1, 2013 6:35PM
avatar

4love....

 

Wrong!

 

Until recently, something that failed in the private sector was allowed (encouraged) to wither and die.

 

There is ample evidence that failures in the public sector seem to go on failing forever and ever.

We've got to get healthcare right and ACA just doesn't seem ready to cut it.

 

 

Oct 1, 2013 6:33PM
avatar
IS THE EXECUTIVE PASTRY CHEF'S ASSISTANT AT THE WHITE HOUSE CONSIDERED AN ESSENTIAL WORKER ?
Oct 1, 2013 5:04PM
avatar
All last month, most of the Talking Heads were worried about a Sept Swoon. You know the story, just because of past history. Well some of us told the talking heads to throw history out the books. We are clearly in uncharted territory. Fact is, all three Major Averages were up in Sept. So much for history.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.