What Impact is the Debt Ceiling Battle Having on the Stock Market?

4/13/11: 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 are getting a lift this morning from gains in overseas markets, solid retail sales and commodities strength. A major bank’s earnings numbers were well received initially, but were not quite strong enough to propel the banks broadly higher this morning. Elsewhere, President Obama’s speech on deficit and debt reduction and the Federal Reserve’s beige book will garner attention from traders. European markets are higher in mid-day trading overseas while Asian markets closed higher as resource stocks recovered earlier losses. Gold is getting a lift from some pressure on the dollar as markets expect continued accommodative U.S. monetary policy. Crude, which pared early gains, will take direction from weekly inventory data due later this morning.

Looking back at Tuesday, commodities weakness and renewed Japanese concerns drove stocks lower. Further, a lackluster earnings report from a major U.S. manufacturer did not help matters. Japan experienced two more earthquakes yesterday while the government raised the severity level on its nuclear crisis to its highest category and reduced its economic growth outlook. Growth concerns weighed on crude, which fell more than 3% and led to a similar decline for the Energy sector. All 10 S&P sectors were lower except Consumer Staples, which benefits from lower commodity prices. Led lower by crude, the CRB Commodity Index lost nearly 2% and is now down the past two days after seven straight gains.

The Markets and You Broken Down:

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

  1. So, what is the potential market impact of the debt ceiling battle? Concern over the debt ceiling would likely drive investors seeking safety into cash, hard assets like gold and silver, and safe-haven currencies like the Swiss franc. However, if a deal is reached to address the nation’s long-term deficit issue as a result of the debt ceiling debate, the market would likely view this as a positive development for equities, as it would lower long-term interest rates (all else being equal), spurring investment, M&A activity and economic growth both here and abroad.
  2. A major bank’s earnings results kicked off first quarter earnings season and were generally in line with expectations, providing some “macro” insights into the group. Results suggest tepid revenue growth for the group as new loans are not yet offsetting those that roll off and capital markets actively slowed from the very strong prior-year period. Reductions in loan loss reserves are driving profit increases, a positive signal but not enough by itself to drive meaningful bank outperformance.
  3. March retail sales data reveals that consumer spending held up well despite rising consumer energy prices. We always focus on such data carefully, as 70% of the U.S. economy is consumer driven, a significantly higher percentage than most nations. Core retail sales (which excludes autos, gasoline and building materials) rose a solid 0.4% month-over-month in March and were up 5.1% from a year ago. In the three months ending in March (Q1 2011), core retail sales rose at a 7.7% annualized rate, an acceleration from the 6.5% annualized rate of growth in Q4 2010. What we think is most interesting is that the 7.7% gain in core retail sales in Q1 2011 was the strongest since Q1 2006, and achieved without any help from home equity cash (which boosted consumer spending throughout the 2002-2007 recovery).

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
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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