Crisis averted, now what?

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Mark Twain died in 1910, but his words were prescient: “No man’s life, liberty, or property are safe while the legislature is in session.” Here we are, a century later, and ideological differences among Capitol Hill lawmakers just managed to shut down the government for 16 entire days. While Congress bickered, ratings services kept a close eye on the nation’s credit with Fitch warning it might downgrade the country’s AAA rating. Both Standard & Poors and Moody’s cut estimated QTR 4 GDP as a result of the work stoppage — hopefully not enough of a bite to throw the US economy back into recession. While Congress was gridlocked US stocks traded cautiously: hoping for the best but prepared for the worst. The country’s largest money market fund manager, Fidelity Investments, liquidated all of its short-term government debt ahead of the US’s October 17 borrowing limit deadline. Now that the government is restored to full operation and Wall Street has set its sights on the economy and corporate earnings, what’s the outlook for US stocks? Historically the S&P 500 rallies post-shutdown. Taking a look at the previous 17 government shutdowns, the S&P 500 has traded higher, on average, 1-month and 2-months after resolution. History also tells us that when the S&P 500 increases as much as it has in the January -September period, the rallies tend to persist through year-end with the S&P 500 up 79% of the time, rising an average 4.45% in the fourth quarter. In other words, strength begets strength. Looking ahead to 2014, traders will once again be forced to focus on the budget and debt ceiling as the agreement to reopen the government didn’t really resolve anything – Democrats and Republicans merely kicked the can down the road. The United States now runs out of money on January 15.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

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