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Halloween Brings Jitters to Capital Markets

Market Digest – Week Ending 11/1

There were tricks but no treats in the capital markets this Halloween week. On the surface, the S&P was essentially flat, gaining just 0.1%. But just about everything else was down. Small cap stocks represented by the Russell 2000 fell 2.2% and International stocks lost 1.1%, mostly due to a rising dollar. The Fed released minutes from its last meeting on Wednesday. There were no surprises and bond buying will continue at the current rate. Comments later in the week by some Fed officials suggested they favor tapering sooner than later which caused bond prices to decline. Gold also fell.

Weekly Returns:

S&P 500: 1,762 (+0.1%)
FTSE All-World ex-US: (-1.1%)
US 10 Year Treasury Yield: 2.62% (0.12%)
Gold: $1,315 (-2.7%)
USD/EUR: $1.349 (-2.3%)

Major Events:   

  • Wednesday – As anticipated, the Federal Reserve said it would maintain its $85 billion monthly bond purchases.
  • Wednesday – ADP said the US private economy added only 130,000 jobs in October, hurt by the 16 day government shutdown.
  • Thursday – Federal Aviation Administration said Airplane travelers will soon be able to watch videos and play games with their electronic devices throughout their entire flight, but cell phone calls are still banned.
  • Thursday – Nicknamed the tech “surge”, a team of tech experts from Google, Red Hat and Oracle is being sent to help the Obama administration iron out the technology problems plaguing the implementation of the Affordable Care Act.
  • Friday – The U.S. posted a $680 billion budget deficit in the 12 months ended September 30, the smallest in 5 years.

Our Take:

A combination of growing employment, sequester, and tax increases has reduced the US budget deficit for the last year to the lowest level since before the housing bubble popped. And the trend is improving. It is reasonable to think the deficit could approach zero in the next five years. This is good news. One of the risks facing investors is rising interest rates and falling bond prices. If the government can issue less debt, lower supply will help keep interest rates down.

The trend also indicates that the US economy is doing better than most people think. GDP growth has been uninspiring, but if you only look at the private sector it was above 3% for second quarter, the most recent one we have data for. Not great, but not bad either.

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