Download Weekly Advisor Analysis 10-07-13 PAA

Weekly Advisor Analysis
October 7, 2013
Government Shutdown Draws Yawns
Despite the absolute obsession throughout the last week with the “government shutdown” by
almost every major U.S. media outlet that had most people fearing catastrophic economic damage,
it was business as usual on Wall Street last week. Stocks essentially ended the week where they
began with the S&P 500 closing down 0.07 percent on the week, according to CNBC. Although
Congressional members do need to address the quickly approaching debt ceiling, it appears at this
point investors remain confident this particular issue will be addressed with a more urgent
approach by lawmakers.
Source: Yahoo! Finance
Why Didn’t the Government Shutdown Sink Stocks?
In order to answer this question, we must first actually assess what a “government shutdown”
actually means and, in this particular situation, it’s most likely not quite what most would imagine.
According to the Washington Examiner, a member of the Senate Budget Committee informed the
outlet that, “based on estimates drawn from CBO (Congressional Budget Office), and OMB
(Office of Management and Budget), 83 percent of government operations will continue.”
Therefore, in this case a “government shutdown” actually only pertains to 17 percent of
government spending being affected. Considering government spending represents approximately
19.5 percent of the U.S. economy, according to the Bureau of Economic Analysis, this is certainly
cause for some concern. However, we must be careful in understanding just how much concern
this issue actually deserves. While any negative impact to economic growth at a time where the
economy is still advancing at a pace below historical averages is not good, the ultimate severity of
the situation isn’t expected to be as severe as some may fear.
Key Economic Statistics Unavailable
The monthly jobs report was supposed to be released last Friday, but due to the government
shutdown investors were left in the dark on the most recent reading on the health of the U.S.
employment picture. With employment being a key statistic used by the Federal Reserve in
making decisions on their monetary policy, it’s becoming more unlikely for Ben Bernanke to once
again announce no change will be made in the monthly asset purchasing program following the
next Federal Open Market Committee meeting which takes place on October 29-30. More
importantly, with our nation’s leaders continuing to show their inability to reach agreements, one
would surmise the Federal Reserve is less likely to alter their current plans while the threat of the
U.S. government not raising the debt ceiling remains outstanding. According to the most recent
Bipartisan Policy Center estimates, the U.S. Treasury could completely run out of funds as early
as October 18th if the current debt ceiling remains in place.
Earnings Season around the Corner
It’s that time again when publicly traded corporations release their most recent quarterly results
and update investors on their outlooks for the future. Leading up to this round of earnings releases,
companies in the S&P 500 have once again set a record on issuing negative preannouncements.
According to The Wall Street Journal, 89 companies have warned investors results will be less
than previously forecasted while only 19 have issued positive announcements and raised guidance.
The ratio of 4.7 bad announcements for every 1 good announcement is the highest ever recorded.
However, before you assume this is bad news for stock prices, we must remember the previous
record was set just last quarter, and stocks have continued to rally despite this phenomenon.
Furthermore, according to FactSet, 86 percent of the companies who had issued a negative
preannouncement last quarter ended up exceeding the lowered guidance numbers anyway, far
more than the average 65-70 percent of corporations that typically surpass expectations, again
according to The Wall Street Journal.
Best regards,
UDB Financial
Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced
within a country’s borders in a specific time period, through GDP is usually calculated on an annual basis.
It includes all of private and public consumption, government outlays, investments and exports less imports
that occur within a defined territory.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark
for the long-term bond market.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
Sources:
http://www.cnbc.com/id/101087295
http://www.cnbc.com/id/101075952/
http://www.bloomberg.com/news/2013-10-04/u-s-stock-futures-rise-as-investors-await-shutdowntalks.html
http://chart.finance.yahoo.com/z?s=%5eGSPC&t=5d&q=&l=&z=l&a=v&p=s&lang=en-US&region=US
(Chart)
http://www.cnbc.com/id/101084189/
http://www.usatoday.com/story/news/politics/2013/10/04/government-shutdown-five-thingsfriday/2919199/
http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm
http://washingtonexaminer.com/wheres-sense-of-crisis-in-a-17-percent-governmentshutdown/article/2536862
http://www.economonitor.com/dolanecon/files/2012/04/P120428-6.png (Chart)
http://www.washingtonpost.com/blogs/wonkblog/files/2013/09/debtXdate.jpg (Chart)
http://online.wsj.com/article/SB10001424052702303492504579113610117024386.html#printMod
http://si.wsj.net/public/resources/images/MI-BY862_AOT_NS_20131003175703.jpg (Chart)