The debt ceiling clock keeps ticking.

clock7/27/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened lower this morning as Washington remains at impasse as next week’s deadline approaches.  The lack of reported progress and likelihood that the U.S. loses its AAA credit rating is putting some pressure on global equity markets and pushing gold to another fresh new high.  Markets are largely ignoring today’s earnings news which is mostly positive, while sluggish durable goods orders didn’t help.  Banks are among Europe’s biggest decliners, while Asian markets tracked yesterday’s losses in the United States.  Gold and silver are solidly higher again, by 0.5% and 1.5% respectively, on safe-haven buying while crude is down on concerns about growth and inventories.

Looking back at Tuesday, stocks ended the session lower as investors continue to monitor debt deal talks in Washington while keeping an eye on corporate America as earnings season continues.  The economic data was mixed, with an unexpected improvement in consumer confidence but more weak housing data.  Technology was the only influential sector in positive territory, with support from the Hardware and Internet groups.  The narrow Telecom sector also managed a modest gain, while several earnings disappointments weighed on Industrials.  Commodities were broadly higher, led by copper, aluminum and grains.  Crude inched higher to close near $100 a barrel, while gold tacked on another five dollars to $1617.

Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

1. What is the potential impact to the stock market if the U.S. credit rating is downgraded? Although the bond market has not priced in a downgrade, there is widespread acknowledgement in the stock market that the U.S. will lose its AAA rating in the next few months.  Rates may move higher, but the impact on earnings (the key driver of stock prices) is not likely to be significant.  A much more significant hit to earnings would occur if the U.S. defaulted on its debt, or the Treasury was forced to prioritize payments to avoid a default.

2. If the U.S. credit rating is downgraded, what will it take to then get an upgrade? Simply said, putting a solid plan in place (and sticking to it) to reduce the deficit and begin paying down the debt.  Canada and Australia in the 1990s are the most notable examples of AAA rated countries that lost the rating and regained it later on via less spending and more revenues.

3. Durable goods report for Q2 looks solid despite a weak June. Durable goods orders – a good leading indicator of future business capital spending – was weak in June, though orders increased at an 18% annualized rate in the second quarter relative to the first quarter, which bodes well for capital spending in the second half of 2011.  Core durable goods shipments – which feed directly into the business capital spending portion of GDP – rose at a 10% annualized clip in the second quarter, after just a 4% gain in Q1.  This suggests that business capital spending will again be a big plus for GDP in the second quarter.

4. The Fed’s Beige Book is due out at 2 PM ET today. The Fed’s Beige Book – a qualitative assessment of business, banking and economic conditions in each of the 12 regional Federal Reserve districts (Boston, NY, Philly, etc.) – will cover economic conditions since the last FOMC meeting in late June, a time period dominated by the debt talks, rising input costs, the end of the economic soft spot, sagging consumer sentiment and increased bank lending.  Much of what’s said in the Beige Book finds its way into speeches by Fed officials and ultimately, the FOMC meeting statement and minutes.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

 

Greg Powell, CIMA
President/CEO
Wealth Consultant

 

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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How did markets react in the last government shutdown? Calm market open suggests that confidence in a debt deal remains.
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