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Congress Acts – Finally, Markets See Clear Skies

Market Digest – Week Ending 10/18

There was nothing inspiring about the deferment the debt ceiling, but capital markets staged a relief rally anyway. Early Thursday, a bill was passed which pushes the debt ceiling out to early 2104 and reopens the parts of the government that were shutdown. Stocks and bonds rose as the worst case scenario was avoided.

Weekly Returns:

S&P 500: 1,745 (+2.4%)
FTSE All-World ex-US: (+2.3%)
US 10 Year Treasury Yield: 2.59% (-.09%)
Gold: $1,316 (+0.5%)
USD/EUR: $1.369 (+1.0%)

Major Events:   

  • Monday – Senate leaders said they were close to an agreement to reopen the federal government and avoid a debt default.
  • Tuesday – Fitch Ratings Service put the U.S. credit rating on negative watch.
  • Wednesday – Congress passed a bill reopening the government though January 15th and suspending the debt ceiling until at least February 7th.
  • Thursday – Google released better than expected earnings and revenues. Shares rose, passing the $1,000 mark for the first time.
  • Friday – J.P. Morgan reached a tentative $4 billion settlement agreement related to mortgages it sold during the housing boom.

Our Take:

The deal to raise the debt ceiling wasn’t great, but it wasn’t bad either. At first glance, it sets up a repeat the whole debacle again early next year. But there are a few provisions which offer hope for a better experience. Part of the agreement appoints a bipartisan committee to negotiate future spending levels before the next deadline. It is hard to be too optimistic about this, but you never know. Also, the bill allows the Treasury to use “emergency measures” which reduce the chance of default if Congress again struggles to agree on a deal.

Probably more important, the Republican Party in general suffered real damage to its image. It isn’t clear leadership can control the more extreme members, but they will certainly try a different approach next time. After all, mid-term elections are creeping up.

Since almost no one expected default to happen, we’re a bit surprised stocks rose as much as they did this week. But for what seems like the first time in a while, there is no immediate major threat restraining prices. The debt ceiling, European debt crisis and turmoil in the Middle East haven’t gone away. But at least for the weekend, none seem imminently problematic. Let’s enjoy it.

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