October 2013

Without Washington. . .

Regardless of which side you are on, you have to agree that our elected representatives in Washington could mess up a two-car funeral. As of this writing, they are engaged in an increasingly serious game of chicken that already has shut down large parts of the government and is threatening -- for the first time ever -- to fail to raise the debt ceiling to allow the U.S. to make the payments on loans and other government spending that these same elected representatives earlier authorized.

As a result, national parks and monuments are closed. Head Start programs are shuttered. Mortgage loans are stalled because banks cannot get the information they need for the applications. Perhaps most significantly, 800,000 people received furlough notices, and tens of thousands more in private-sector jobs that serve the government also are out of work. (One of those furloughed is David Wineland, who won the Nobel Prize for Physics in 2012 and who works for the National Institute of Standards and Technology.)

The American people are a combination of frustrated, angry and terrified. The shutdown has sent the markets -- and investors -- on a roller-coaster ride. After shrugging off the early days of the shutdown, the markets fell and rose sharply based on the most recent news.

It is important to remember, though, that the current volatility is almost totally a result of what's going on in Washington rather than what is really going on in the economy. The fundamentals of the economy continue to be very positive -- just as they were when they propelled the various market indices to record highs earlier this year.

Let's look at some of the numbers:

  • The national unemployment rate continues to fall, reaching 7.3% in August. (More-recent numbers are not available due to the government shutdown.)
  • The ISM survey of manufacturing activity hit its highest level in more than two years.
  • U.S. companies still are reporting record profits, even if they have slowed down somewhat from the white-hot first half.
  • Companies still have $1.5 trillion in cash sitting on the sidelines, ready to invest when they feel confident that the recovery is continuing.
  • S&P 500 earnings for 2013 were up 5% over 2012.

Home sales increased in August after a pause in July as homebuyers adjusted to increasing mortgage rates and home prices. All these signs remain positive, and before the current shenanigans in Washington, the economic recovery seemed to be continuing. The fundamentals were good for growth and for profits -- which are the two things that drive both economies and markets.

S&P earnings are projected to set another record in 2014, although this projection should be taken with a grain of salt because 2014 is still a long way off. It is important to note also that an increasing number of companies have been issuing negative guidance for their earnings, meaning caution that they might not meet their projections. This is something that bears watching as we go forward, and it will make stock selection even more important.

However, the biggest factor inhibiting market performance continues to be Washington. The failure of our elected officials to fulfill their most basic responsibility -- to keep the government running smoothly and paying its bills on time -- no doubt will cause a temporary glitch in the recovery. If the government would simply do its job and let the economy do its job, the recovery could get back on track. And that would be good news for everyone.

Garry K. Schaefer
Atlanta, Georgia
October 15, 2013

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