Last week, the keystone cops in Washington signed yet another procrastination resolution to our festering debt and deficit issues. No matter. The market rallied into our fiscal D-Day and right after it to new all-time highs. Why? While the volume of reporting on the debt ceiling has grown substantially, the event itself is old news. Congress has raised the debt ceiling 45 times since the late 1970s. The debt level reached within 2 percent of the ceiling 37 of those times.
These deals always come down to the wire. Therefore, the Congressional debt ceiling dance hasn’t changed, it’s the volume of media dedicated to exaggerating it that has changed. Research drives Wall Street. Focusing on the data and historical outcomes, allows professional investors to shield themselves from poor emotional decision-making. Confident that Washington would simply kick the can on the debt ceiling as they have every 10 months on average for the last 40 years, they turned their attention to the Fed, earnings and the economy.
Sixty to ninety days from now, we will re-enter the over-reported debt ceiling Romper Room. A delay compromise will again pass both chambers, and the debt ceiling issue will return to hibernation. As an investor, please recognize that this is just a cost of doing business. Resist taking the blog bait.
The Global Economy
The IMF lowered global GDP targets for 2014. Estimates for the U.S. and the developed world remain at 2 percent-ish, while the emerging markets outlook slid slightly to 5.1 percent. They expect the global economy overall to grow 3.6 percent in 2014, slightly lower than their July estimates. However, a 3.6 percent growth rate amounts to a 0.7 percent improvement over 2013. Furthermore, with Europe on the mend, Asian growth exhibiting resilience and Washington under pressure to get its public relations act together, these estimates may prove low. Remember that markets rise when reality exceeds expectations.
Of the 500 companies that comprise the S&P 500 index, 100 have now released third quarter earnings. Sixty percent of these reports have exceeded analysts’ estimates, but the earnings growth rate barely hurdles 4 percent. Unfortunately, sales growth leaves even less to be inspired by. The sales growth rate for the quarter amounts to 2 percent. This low number correlates with continued fear and hesitance in the economic marketplace. Corporate cash levels are high, and though loan growth has inched higher, it does not suggest high levels of confidence. So far, the lukewarm earnings season matches the lukewarm economy.
There’s Always Next Year
Markets look forward. Third quarter earnings season may gather validation attention, but recent purchase decisions are eyeing earnings expectations for 2014. S&P estimates earnings growth of 13 percent in 2014. To counteract bi-polar fiscal policy, the Fed must continue to stimulate to promote employment gains. Holding today’s reasonable valuations level, even if earnings miss by half, 6.5 percent from stocks still beats 3 percent from bonds. Much will change between today and Dec. 31, 2014, but for now the fresh money favors stocks, even at new all-time highs.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.