Markets Continue to Wait for Guidance from Fed 12/13/13

This week the market experienced a pullback from record highs as investors captured portions of their year-to-date gains in anticipation of the Federal Reserve meeting scheduled for next week.   Data continues to support the conclusion that we will start to see a reduction in amount of bond purchases in the coming months.  Some strategists think the economy is still too weak to start tapering, but as the economy continues to pick up we expect to see the Fed tightening sooner.   It is possible that the first meeting of Janet Yellen as new chair of the Fed in March of 2014 could be the first real forecasting announcement of any sort.  Hopes are for a well-structured, gradual phase out to ease the impact from reduction in asset purchases and provide a path towards exiting altogether.  

One of the challenges Janet Yellen will face is that nearly two million unemployed Americans may lose their jobless benefits over the next few months.  This could lead to substantial fluctuations in the unemployment rate including a possibility we reach the 6.5 percent benchmark sooner than thought.   This may create unanticipated consequences as the Fed will have to determine if this rate is a good gauge for health of the economy or if other factors need to be considered.  If they decline to taper based on this figure it could create confusion for lack of transparency.

Earnings for companies that reported have been solid, however many are providing lower than expected guidance levels for 2014.  Of those companies that have reported, approximately 80 percent are forecasting lower profit figures than were initially estimated.    Top line revenue growth will be seen as a driving factor behind earnings expansion in the short term as companies have utilized methods such as cost reduction and share buybacks to improve earnings figures.  Looking forward, earnings are expected to rise later next year from improving global growth as Europe and other developed regions continue to recover and emerging economies invest in their infrastructure and more job creating industries.   However, tapering by the Fed could be seen as a temporary headwind in the early part of the year.

Europe

Ireland is the first of the European countries that received a rescue from the European Central Bank (ECB) and International Monetary Fund (IMF) to exit that bailout program.   Three years after the decision was made to seek emergency financial support to avoid a major financial collapse, Ireland is no longer reliant on the support of the ECB and IMF.  They are expected to be paying off the emergency loans they received over the next 20 years.  In agreement with the terms of the rescue Ireland agreed to annual savings, spending cuts, lower minimum wages, and increased taxes.  The nation’s unemployment rate sits at 12.6%.

Recently, American executives have expressed optimism in their expectations for Europe as they anticipate the region to be a bright spot for sales figures in 2014.   Multi-national companies may be beneficiaries of this due to exposure from improving economies and growing countries across the globe.  This sort of shift could be a substantial tailwind for markets next year.

Washington

On Thursday night the House of Representatives passed a budget compromise that now moves on to vote from the Senate.  While the proposal does not address many of the larger, long-term issues such as sustainability of Social Security nor handling of the debt ceiling, an agreed upon compromise would make another government shutdown unlikely.  The budget is scheduled to come to the floor next week.

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