Another round of political brinksmanship in Washington yielded yet another last-minute "kick the can down the road" solution. The solution will allow the government to be funded through January 15, 2014 but the reality remains that this will be an ongoing issue with the partisan divide that exists in Washington. Expectations indicate that the shutdown cut 0.25 percentage points from fourth quarter GDP and has sacrificed approximately 120,000 jobs in October at a time when the country is in desperate need of job growth to accelerate the recovery. For now, the debt ceiling has been raised and the full faith and credit of the United States is kept intact for the major Oct. 31 interest payments. While politically undesirable and economically irrational, politicians avoided their own self-inflicted wounds with another last minute deal.
While the government-induced issues have dissipated, the delayed release of the September employment numbers pointed to a further sputtering economic recovery. US 10-year treasury yields fell to 2.51 percent this week amid job growth numbers that were below forecasts for the third straight month. Due to the timing of the government shutdown, the September numbers are unaffected by the Washington situation which makes the lagging employment outlook even more concerning. The implication here is a sustained monetary stimulus environment from the Federal Reserve. In fact, with noisy economic data to be released over the next month in light of the government shutdown, a taper situation in the remainder of 2013 appears highly unlikely.
Despite widespread expectations that Fed Chairman Ben Bernanke would like to begin tapering while he is at the helm of the Federal Reserve, the market environment is not cooperating, which will likely place Janet Yellen in the role of tapering quarterback in spring/summer 2014.
The equity markets meanwhile have continued their attractive 2013 performance, with the S&P 500 up 24 percent through Oct. 25. Attractive earnings results continue to encourage the market rally. In fact, 76 percent of the companies reporting have beat analyst earning expectations with 54 percent beating on the top line.
While growth projections were lowered for many companies earlier in the year, it is encouraging to see the growth amidst the macroeconomic uncertainty. However, there may be a fair amount of volatility over the coming weeks with the release of suspended economic reports. While the CBOE Volatility Index has come in over the last week since the government uncertainty settled, it would not be surprising to see this tick back above 20 with the variability in economic data to be released in the coming weeks.