The D.C. Shutdown and Market Implications (By Nikhil K. Majithia, CFA, CFP ®)

With our neighborhood (federal government shut-down) drama entering its 2^nd week, we thought it would be appropriate to address the issue while it occupies the forefront of investors’ minds.  

We have no clue as to how the political process will unfold to reach a deal OR if the President will have to use the 14^th Amendment to raise the debt ceiling. 

This time as well, it appears that this will be a cliffhanger! As Warren Buffett mentioned during a CNBC interview last week: “We will go right up to the point of extreme idiocy, but we won't cross it." 

Our Take: A similar incident (debt ceiling negotiations) occurred in 2011 when the equity markets lost about 20% during that uncertain time. The political equations were similar as well (Democrats controlling the White-House and the Senate, and Republicans controlling the House). There was no government shutdown then, but the debt ceiling negotiations went all the way into last few hours of reaching the debt ceiling, before being resolved. 

The table[1] below should provide you a better economic and market perspective.

Debt Ceiling Debate 2011 versus 2013:
	Jul-11	Now (2013)
Unemployment Rate	9.10%	7.3% (August Report)
Weekly Unemployment Claims	400,000	307,000
ISM Manufacturing Index	51.4	55.4
ISM Service Industry Index	53.7	54.4
Case-Shiller Housing Index	139.87	162.49
S&P 500 Index	1292	1682
Rolling 12-Mo Operating EPS (S&P 500)	90.91	99.28
P/E Ratio (on Operating EPS)	14.53	16.94
10-Year US Treasury Rate	2.81 (& Falling)	2.65 (& Rising)
Federal Reserve Involvement	QE2 Ended in early 2011	QE3 ON
Fed Balance Sheet	$2.87 Trillion	$3.73 Trillion
Fed Balance Sheet to GDP	19.20%	23.29%
EU Economy	Much Weaker	Relatively Stable
Emerging Economies	Growing	Faltering Growth

Positives:

• We are clearly on a much stronger economic footing
• Fed is providing a strong backstop
• EU is relatively stable

Negatives:

• Fed’s balance sheet is much larger (as a % of GDP) and they may be at the tail end of QE3 program; there are limits to how much they can expand their balance sheet as a % of GDP.
• Earnings growth  may be peaking now and market valuations look more stretched (no longer cheap)
• Credit market conditions are tightening a little bit (the trend is towards rising rates now); EM economies are slowing.

We have not seen an equity market correction of more than 10% in the US markets since 2011. We are cautious about the market due to the fact the Federal Reserve’s liquidity operations have led the S&P 500 index to go from 1300, in 2011, to around 1680 now, while the earnings have only grown by about 10% during this time. 

Some other relevant Reads:

• GOLDMAN: The Government Shutdown May Continue Even After Congress Raises The Debt Ceiling
• All Of The Craziness In Washington Has Brought Calm To The Markets

The above links are provided for your information only. As they are provided by third parties, NFP Securities, Inc. (NFPSI) does not endorse, nor accept any responsibility for the content. NFPSI does not independently verify this information, nor do we guarantee its accuracy or completeness.

Disclosures & Index Information:

S&P 500 Index: The S&P 500, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies whose common stock is publicly traded on the NYSE and NASDAQ Market.

ISM Indices: An index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing  & Service Sector based on the data from these surveys.

S&P Case-Shiller Home Price Index: The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions.

Investors can not directly invest in these indices.

Disclosure Statement: The opinions and forecasts expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This material is for informational purposes only and is not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation. It represents an assessment of the market environment at a specific point in time and is not intended to be a guarantee of future results. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Securities and Investment Advisory Services offered through NFP Securities, Inc., Member FINRA/SIPC. NFP Securities, Inc. is not affiliated with Gartenhaus Financial Corp.

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[1] Source: www.federalreserve.gov; www.ism.ws; Bloomberg.com; marketwatch.com