Week ahead: Debt Ceiling Thaw Warms Traders’ Hearts

Traders seemed convinced that Congress will come to an agreement on the debt ceiling, which propelled stocks higher on Thursday and Friday, and saved what was starting to look like an ugly week. Presuming that the collective wisdom is correct, then fears of financial catastrophe and recession will recede and everyone can start chewing on the boring old stuff: the pace of economic growth and corporate earnings. Of course it’s difficult to analyze the economy while the government is shut down. Menzie Chinn of EconBrowser notes that even the Fed is forced to conduct “macroeconomic policymaking with increasingly sparse or mis-measured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decision-making, it is.” (You can almost hear Larry Summers saying, “Good luck with the new gig, Janet Yellen!”)

While Wall Street was instantly soothed by the thaw in Congressional relations, Main Street was not yet convinced. Beyond the massive reputational damage lawmakers have inflicted on themselves, many Americans are now worried that the economy will be harmed. Consumer sentiment fell in October to its weakest level in nine months, according to the Thomson Reuters/University of Michigan preliminary sentiment index.

Additionally, a recent Wall Street Journal poll showed that 42 percent of Americans think the economy will worsen over the next year, which is double the amount observed in September, and the number of those surveyed who think the country is on the right track has fallen by half. The WSJ results jibes with Gallup, which showed that consumer confidence now measures at the same low levels as that of the 2008 economic collapse.

Suffice it to say, if political gridlock goes on too long, then consumer confidence could drop, which could lead to slower than expected spending during the holiday shopping season. To underscore the risk of sliding consumer confidence, the Leaders of the National Retail Federation sent a letter to Congress, warning:

“For retailers – who represent the sector of the American economy most closely tied to consumer attitudes – these numbers are deeply disturbing…Moreover, since the very modest growth the U.S. economy has experienced following the 2008 recession has been attributed to the willingness of the American consumer to keep shopping, a lasting decline in consumer confidence is likely to translate into increased unemployment and slower growth in coming months.” The NRF also detailed practical problems the shutdown has created for retailers – from the lack of economic data and reports to concerns over processing of imported merchandise.

If the economy were to slow, it would be bad news for companies, which were at the precipice of doing something that have not done in a while: spending some of the piles of cash they have accumulated. As a reminder, non-financial companies held a record $1.78 trillion in cash and other liquid assets as of the first quarter of the year. Many analysts thought that the companies would start to spend money in order to expand their businesses and drive more sales. If Congressional bickering drags on too long, some companies may rethink those plans.

MARKETS:

• DJIA: 15,237 up 1.1% on week, up 16.3% on year
• S&P 500: 1703, up .7% on week, up 19.4% on year
• NASDAQ: 3791, down 0.4% on week, up 25.6% on year
• 10-Year Treasury yield: 2.68% (from 2.65% a week ago)
• Nov Crude Oil: $102.02, down 1.7% on week
• Dec Gold: $1268.20, down 3.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.34

THE WEEK AHEAD: Government reports in italics are due to be released, subject to the status of the shutdown. Reports that were delayed over the past two weeks, including the all-important jobs report, could be released this week, if a deal is reached. Q3 earnings season gets into full swing, with a slew of S&P 500 companies reporting this week.

Mon 10/14: Columbus Day: US stock markets open, bond markets and banks closed

Tues 10/15:

Citigroup, Intel, Johnson & Johnson, Coca Cola, Yahoo, Schwab

8:30 Empire State Manufacturing Index

Weds 10/16:

AMEX, Bank of America, BNY Mellon, Pepsi, IBM, eBay

8:30 CPI

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 10/17: DEBT CEILING D-DAY

Capital One, Goldman Sachs, Verizon, Google

8:30 Jobless claims

8:30 Housing Starts

9:15 Industrial Production

10:00 Philadelphia Fed Survey

Fri 10/18:

GE, Honeywell, Morgan Stanley, Schlumberger

10:00 Leading Indicators