10/02/13   From Shutdown to Debt Ceiling

Editor’s Corner

Ron Rowland

Today is Day-2 of the U.S. Government shutdown.  The market didn’t seem to mind, with a 62-point gain in the Dow and the 1.2% jump in the Nasdaq Composite on Tuesday.  That didn’t stop media outlets from making you think the world was reacting negatively yesterday to what was going on here.  We saw more than one news outlet alluding that the crisis was hurting the U.S. dollar in the world currency market.  In reality, the currency market had one of its least volatile days on record.  The PowerShares DB US Dollar Index ETF (UUP), which measures the dollar against a basket of currencies, traded in a range of 0.3% yesterday and ended the day less than 0.1% below its prior close.

The past 17 government shutdowns were good for the country in one respect – they all brought about quick compromise when compromise was thought to be impossible just a few days prior.  The 18th shutdown may be different though.  Both sides appear to be equally stubborn and are more interested in placing blame than finding solutions.

The government shutdown will affect every U.S. citizen, some more than others.  Current estimates indicate 800,000 government employees could face furloughs – they have unwillingly become the front line in this battle.  Other impacts will be more subtle.  Economists, investors, and market watchers anxiously await the monthly release of employment statistics, especially in the past few years.  Due to the shutdown, the Bureau of Labor Statistics will likely delay the release of the September employment report originally scheduled for this Friday.

That places even more importance on ADP’s National Employment Report released earlier today.  It claimed private employers added 166,000 jobs in September and revised the August figures down to 159,000 from the 176,000 originally reported.  Like most employment reports this year, this one disappointed, falling short of the 180,000 new jobs expected.  Additionally, these figures do not account for any impacts resulting from the government shutdown now underway, which can only make things worse.

We can’t help but think the antics in Washington this week are just a prelude to the real showdown over the debt ceiling debates later this month.  For now, the markets are taking it all in stride, but it’s easy to envision a scenario where they don’t.  Welcome to the fourth quarter.

Investor Heat Map: 10/2/13

Sectors

Consumer Discretionary reclaims the top position today after relinquishing it to Industrials for two weeks.  It was not so much a renewed surge for Consumer Discretionary as it was softness for Industrials.  Technology, Materials, Health Care, and Energy didn’t alter their positions but weakened somewhat amid increased uncertainty surrounding the government shutdown.  There was some shifting in the lower section of the Sector rankings although they were not of much significance.  Telecom climbed two spots to seventh by swapping places with Consumer Staples.  Utilities’ post-FOMC meeting rally was short lived, and it has slipped into a negative trend again.  Real Estate remains on the bottom.

Styles

There is wider dispersion in the Style rankings today as the strong got stronger and the weak got weaker.  Small Cap Growth and Micro Cap continue to provide the upside leadership, and they increased their margin over the remaining categories.  Small Cap Blend and Mid Cap Growth held their ground in third and fourth.  Small Cap Value broke up the clean delineation of Growth over Value that has been in place for many months by moving ahead of Large Cap Growth.  This is more evidence of the market’s continued preference for small company stocks.  Large and Mid Cap categories occupy most of the lower tier.  At the bottom, Large Cap Value and Mega Cap weakened, and they are falling further behind the other categories.

Global

Last week, Europe was barely able to claim first place, but today it is displaying a significant margin over the rest of the field.  Every Global category lost momentum over the past week, and Europe is excelling by losing the least.  EAFE moved up a notch to second place, and Pacific ex-Japan jumped two spots despite weakness in Australia, its largest constituent.  China slipped from second to fourth but appears to be preparing for another upside push.  Japan climbed three spots to rejoin the upper tier.  The U.K. held steady at sixth although now finds itself in a tie with an improving World Equity.  Emerging Markets suffered the largest drop in the relative rankings, falling four places to land in eighth.  Latin America moved down a spot to be close to its other Western Hemisphere neighbors.  Momentum weakens as we move north with the U.S. behind Latin America and Canada on the bottom.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“The sad news is that, given the performance to date, that the debt limit extension is coming up in two weeks, and this does not portend responsible action on the debt limit.”

Steny Hoyer, House Democratic Whip on 10/2/13


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