Monday, October 7, 2013
Stocks haven't reacted much to the Washington discord thus far,
hoping that sanity will eventually return at the last minute.
That has been the norm in the recent past. In all recent
political fights - the Fiscal Cliff, the budget sequester and the
2011 debt ceiling fight - politicians took the country to the
edge before stepping back.
But the markets are starting to get worried, with the shutdown
now in its second week and the October 17th debt ceiling deadline
fast approaching. The protagonists came across as stubbornly
standing their ground in the Sunday talk shows. Disconcertingly,
we didn't get the impression that any negotiations were or are
going on behind the scenes. The Speaker is apparently waiting for
a call, but the other side doesn't see the point of making that
call. Let's hope there are still enough centrists in the
political system to bridge the divide and bring the two sides to
The DC Drama has sucked the oxygen from everything else, with the
shutdown robbing us of economic data. We didn't get the jobs
report last week and this week's Retail Sales report wouldn't
come through either. The key report that we will get this week is
the minutes of the Fed's last meeting, when they surprised
everyone by not Tapering.
The minutes will give us a good sense of how close the
no-Taper call actually was, which will help set expectations
about the Fed's coming meeting. The odds of a Taper announcement
in this month's Fed meeting are low now, if for no other reason
than the paucity of any data that the Fed can rely upon in making
that call. That's perhaps the only thing positive about the
current shutdown - the absence of data could result in further
The 2013 Q3 earnings season gets underway this week, with reports
) on Tuesday after the close and
) on Friday. Hopefully, the shutdown will be behind us before the
earnings reporting season gets into high gear next week.
Expectations for earnings growth in Q3 remain low, with total
earnings for the S&P 500 expected to be up +1.1% from the
same period last year. As has been happening repeatedly in recent
quarters, estimates came down sharply as the quarter unfolded.
The current +1.1% growth in Q3 is down from +5.1% in early July,
with negative guidance from management teams the primary driver
of estimate cuts. This has become a recurring theme for more than
a year now, with management teams overwhelmingly guiding lower
for the following quarter.
Given the elevated expectations for Q4 and beyond (earnings for
the S&P 500 are expected to be up almost +9%), it will be
interesting to see if we will get a repeat performance or
something new this time around. I expect more of the same, with
negative guidance prompting estimate cuts for Q4 and beyond.
The market hasn't cared much thus far about negative estimate
cuts. But will it finally start paying attention? We will find
out in the next few weeks.
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