The S&P 500 closed at an all-time high as investors shifted their focus from the debt ceiling debate to earnings. Google (GOOG), General Electric (GE), and Morgan Stanley (MS) all reported earnings this week that exceeded expectations and the latest economic data from China showed GDP grew better than anticipated at a 7.8% annualized rate in the 3rd quarter.
Speculation that the Federal Reserve will delay cutting monetary stimulus has also helped push stocks higher. The Fed stimulus has also helped propel the S&P 500 up by more than 150 percent from its March 2009 low.
Investors will have to wait until October 21st before they get the next glimpse of macroeconomic activity, when data on existing home sales is released. The September jobs report, which was originally scheduled to be released on October 4th, will be issued on October 22nd. The jobs report was delayed by the partial government shutdown. October unemployment data will also be delayed and the scheduled release date is now November 8, rather than November 1.
Going forward, investors will focus on earnings, economic activity, and jobs data. Jobs data is particularly important as the Federal Reserve will use this gauge as a primary driver for their decision to maintain or taper their current accommodative monetary policy. The Federal Reserve will maintain their current monetary stance until the next Federal Open Market Committee (FOMC) meeting announcement on October 30.
This is a very delicate environment for fixed income investors. If the Federal Reserve announces that they are going to taper their monthly purchases by more than expected, interest rates will likely shoot higher, sending bond prices lower. This was evident earlier this year in June, when Chairman Bernanke just hinted that the Federal Reserve may begin tapering, causing interest rates to spike and bond prices to drop. Bonds have enjoyed a 20-year Bull Run as interest rates over the past 2 decades have steadily declined.
Early Thursday morning, President Barack Obama signed a bill that ended a 16-day partial government shutdown and raised the debt ceiling. Weeks of acrimonious political fighting gave way to a hectic night in Washington Wednesday night as the GOP – led House gave the final stamp of approval to the Senate brokered bill.
This bill is only a temporary fix and simply pushed the debt cushion out to February 7, based on current spending levels. This means that this same story may play out again in just a few months. The bill did not address many of the contentious and complicated issues being discussed, including changes to entitlement programs and tax reform.
Hopefully, Congress will not let the negotiations slip to another 11th hour resolution, but given the current divide in Washington, this almost seems inevitable.
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