All eyes are on the nation’s capital as the possibility of a government shutdown is imminent and markets are starting the week rife with sell-offs. With the political jockeying focusing on Obamacare, our view remains that we will see some sort of continuing resolution passed and if there is a shutdown, it will be brief. This should pave the path for eventual compromise on the debt ceiling debate that will take front stage in the coming weeks. Both sides of the political aisle are aware of the implications to global markets by failing to raise the debt ceiling. This hype and politicking is taking the eye off the fundamentals of the economy and markets as we enter the 4th quarter, consistently the strongest throughout market history.
The lack of clarity emanating from the recent fed decision not to taper is still resonating, causing investors to pause and question their posture approaching the end of the year. Markets want transparency and a clear path of action from those running global central banks. With Larry Summers exiting the Fed chair race, and every indication that Janet Yellen will succeed Ben Bernanke, we expect a dovish accommodating fed that will be cognizant of spurring corporate growth. Our big picture view on the economy remains conservative as we have seen improving data in consumer confidence (overall), manufacturing data, auto sales, and a reduction in the current budget deficit.
The Silver Lining
While markets are focusing on the uncertainty looming in Washington as well as anticipation of 3rd quarter earnings reports, one overlooked fact has been the recent increase in bond prices since Summers’ exit. We have responded by further reducing maturities in our bond portfolios as we believe this will be a short term event. Our long term outlook sees bond yields continuing to rise as the economy strengthens. Corporate data has also been encouraging with Ebay’s deal to purchase Braintree to improve PayPal mobile services and Twitter’s decision to go public. We remain confident that as we muddle through the events in Washington, in the coming weeks the market will return to fundamentals. We expect the market to hit fresh highs as we approach the end of the year and are using any weakness to bring portfolios underweight in stocks back to the allocation in the IPS (Investment Policy Statement).
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