“How Will You Live John? Day by Day…” – Rambo II

By David B. Armstrong, CFA | Oct 21, 2013 | Weekly Market Commentary

It’s from the end of the movie when John Rambo walks off from Colonel Trautman after the POW rescue mission.  It’s similar to the way everyone probably felt last week during the shutdown and debt ceiling talks.  After all the posturing and bickering, the American people got a three month reprieve from all the Washington baloney (my apologies to baloney).  What a bunch of BUNK!  However, from the end of September until a deal was struck on October 16, the major indices all gained ground with the Standard and Poor’s 500 Index (S&P 500) and the Russell 2000 setting new record highs on the Thursday and Friday following the deal.

Washington D.C. Circus – Fold up the Tents, for now it’s over.

Like Rambo II, the sequel to the December, 2012, brinksmanship was less exciting and equally as predictable.  Politicians took the markets and the nation to the brink before hammering out an agreement that ended the government shutdown and raised the debt ceiling. But was anyone surprised that a deal got hammered out?   We weren’t and we’ve been encouraging readers to keep a focus on the long term by not trading the market.  Unlike Rambo, this was real life. On the morning of October 16, Senate negotiators announced a compromise that easily passed the Senate that evening, followed by a vote in the House and a signature by the President.

So what did we get besides HOURS of riveting television and commentary? Here’s a summary:

• The deal keeps the federal government open at current spending levels until January 15.
• The debt ceiling will be raised through February 7.
• Lawmakers will also be required to craft a long-term budget plan by December 13.
  • Senator Majority Leader, Harry Reid, said the committee to accomplish the task will be led by Senator Patty Murray, a Washington Democrat, Representative Paul Ryan, a Wisconsin Republican, and the 2012 Vice President candidate under Mitt Romney.
• It includes no major alterations to the 2010 health-care law, though it does include new procedures to verify the incomes for some folks receiving government health-insurance subsides.
• It does not include a provision granting federal agencies more flexibility to ease the effects of the sequester – which is the annual automatic budget cuts included in the 2011 budget deal.
• The next round of spending cuts (sequester) set for mid-January will bring annual spending levels down to $967 billion from $986 billion, largely through cuts to defense spending.

The short-term extension was ultimately well received. Though we experienced some short-term volatility in equity markets since the start of October, the major indices gained ground during the government shutdown (I’m using the dates from September 30, 2013, to October 16, 2013).  The Dow Jones Industrial Average was up 1.61%, the S&P 500 index was up 2.38% and the Russell 2000 index was up 1.74%.  Here’s a snapshot of how well the sectors did with a chart from Bespoke Investment Group.  It is not surprising that the more defensive sectors did well but all were positive.

From our blog that was published at the onset of shutdown I wrote:

“I have no more of an idea about what will happen than Speaker Boehner does…so I’ll leave it at this: Our conviction is to stay invested unless your need for short-term liquidity has changed.  The need for short-term liquidity should be the only reason an investor is selling right now. If you can’t sleep at night, your asset allocation does not accurately reflect your risk tolerance and you should call your advisor to update your long-term planning and allocations.”

One last helpful Bespoke chart (below) shows how the S&P 500, the NASDAQ and the Russell 2000 have all broken through their previous highs (reflected by the straight line).  The Dow Jones Transportation Average is thrown in there too, but we don’t regularly write about that index.

It’s EARNINGS SEASON!

While it’s early in the season, there has been some reporting.  As of last Friday, we’ve heard from 190 out of the more than 2,000 that will report. However, the real heavy reporting begins this week.

While it’s really a little too early to measure the ratio of companies posting negative guidance against the companies posting positive guidance, last quarter ended as the 8^th quarter in a row of a negative spread for this ratio.  We will be writing about it in upcoming blogs.

The percentage of companies beating their revenue estimate for the 3^rd quarter of 2013 currently sits at 50.9%, which is much lower than the average of 60% since 2001.  The percentage of companies beating their earnings estimates stands at 60.5%, which is lower than the final reading from the 2^nd quarter.

Please call or email with questions.

Investment advice offered through Monument Advisory Group, LLC a Registered Investment Advisor (RIA). Securities offered through LPL Financial.  Member FINRA/SIPC.  Monument Advisory Group and Monument Wealth Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.