Let’s Make a Deal
After two weeks of a partial government shutdown and on the eve hitting the debt ceiling, the Senate cobbled together a short-term fix to reopen the Federal government and kicked the debt ceiling “can” down the road for a couple months. Despite all the hysterics in the media that included dire warnings and countdown clocks, the U.S. economy, as well as the equity markets, held up fine. While we expect a short-term hit to economic growth due to the shutdown, we do not believe it will have a lasting effect. Though equity markets have been volatile during this period, stocks actually traded higher in October, resulting in an all-time high for the S&P 500. We believe that consumer confidence will pick back up through the remainder of the year. The wildcard in Washington is whether or not there will be a “grand bargain” before we hit the debt ceiling again or will the short-term band aids be more common, thus creating more uncertainty.
While interest rates fell a bit over this time, it was another story for the U.S. dollar as the major European currencies are close to 52-week highs relative to the greenback. While this may not positively impact a planned European vacation, it will benefit major exporters because their goods will be relatively cheaper in the world market.
Blackened Big Blue
IBM reported a disappointing and sloppy quarter earlier this week. While once a bellwether for the technology space, the company has struggled in recent years, and have been unable to post revenue growth on a year-over-year basis for eight quarters. However, IBM has been able to hit profit targets due to reduced costs, lower tax rates and share buybacks. The key metric we have been watching is free cashflow and this has not been compelling enough for us to step in at current levels, even though the stock is 20 percent off its high.
Third quarter earnings have been coming in mixed across the market. Semiconductor stocks are seeing a slower fourth quarter while Google’s growth continues to exhibit strength. The regional banks are experiencing sluggish loan growth and some compression in net interest margin. However, they are hitting profit targets due to cost cutting. Although the big industrials, such as GE and Honeywell, have delivered healthy reports this week, they are showing a bit of caution in their outlooks over the next few quarters. Looking toward 2014, overall corporate earnings are still forecasted to grow close to 10 percent. While this may prove to be too optimistic, we remain bullish on equities due to continued earnings growth and low inflation, which should translate into further P/E expansion.
Out Takeaways from the Week
- Even at current levels, equities are still attractive on growth and value metrics
- While Washington tried its best to slow down the U.S. economy, we believe overall growth with continue as consumer confidence picks up