Stocks & Markets React as US Government Shutdown – Third Quarter Market Commentary

STOCKS IN A LAND OF CONFUSION

“If you’re not confused, you’re not paying attention.” – Anonymous

“What is right is not always popular and what is popular is not always right.” – Albert Einstein

Stocks and market do not like uncertainty.

stocks us government shutdown

Stocks react as US politicians are once again playing a game of brinkmanship.

As we enter the last quarter of 2013, US politicians are once again playing a game of brinkmanship; unfortunately one that could have dire consequences for the world’s economy.  Politicians continue to entrench opposing positions rather than engage in positive action.  It is highly unlikely that the entire US government will shut down as essential services will remain active, but nevertheless, investors dislike uncertainty and markets have been under pressure as the Third Quarter closed.

Investor behaviour during the quarter appeared less than consistent with past experience.  Despite this contradictory behaviour, results generally finished in positive territory.

                     Canadian Dollar

US Dollar

Q1

Q2

Q3

YTD

 

Q1

Q2

Q3

YTD

 

Toronto Stock Exchange

3.3%

-4.1%

6.2%

5.3%

S&P 500

13.2%

6.5%

3.1%

24.4%

10.6%

2.9%

5.2%

19.8%

MSCI EAFE*

6.8%

1.3%

8.7%

17.7%

4.4%

-2.1%

10.9%

13.4%

91 Day T-Bill

0.2%

0.2%

0.3%

0.7%

DEX**

0.7%

-2.4%

0.1%

-1.6%

CDN/US dollar

-2.2%

-3.2%

2.2%

-3.8%

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

As noted last quarter, it appeared to be a bit of a conundrum as the Federal Reserve discussed reducing the degree of market intervention undertaken thus far, presumably due to indications of a stronger performing economy, yet investors reacted negatively as fears that the lesser levels of intervention would be insufficient to maintain current yields. In other words, there is a discontinuity between the reality of improving economic conditions and the perception of the investment market participants as to the durability of that growth.

Statistics continue to indicate that inflationary expectations are low.  Typically, this would be a good environment for bonds yet the pressure on yields has been to the upside pushing bond prices down.  The appetite for stocks has been improving suggesting a willingness to engage in riskier assets.  The American economy has been showing signs of improvement while the Euro-zone has been somewhat more stable yet emerging markets have been weaker as growth there has slowed.  As a result, this appetite for risk has not translated to the emerging economies but has in fact been shunning them.  Expectations for global economic growth has dampened as a result since the emerging economies have a much larger impact now than a few years back.  Yet, as previously noted, the trend has generally been into equities despite lower expectations in global growth.

Could inflationary expectations transform into deflationary fears as the emerging markets slow and their currencies lose value relative to the developed countries?  Commodity prices were generally better in the Third Quarter however they remain largely down for the year to date.  Lower commodity prices generally translate into an improved environment for consumers while low inflation is typically good for bond prices.  Mounting debts in the public sector will eventually put pressure on interest rates to increase but the day of reckoning will be postponed as long as the politicians can push it forward.  In the interim, emerging markets have demonstrated great resistance to currency adjustments.

As the above text indicates, investors today appear confused.  Their focus would appear to be on immediate reactions to geo-political events.  This was evident in August when developments in Syria negatively impacted equities.  Although this uncertain environment would normally be perceived to be positive for gold, the price has declined in the latter part of the quarter.

This concentration on exogenous events has taken the focus off fundamentals.  Shocks will continue to impact short-term market directions as investors over-react to economic news releases.  This environment will provide opportunities for value investors to select mispriced stocks over the coming months.

Read our third quarter fixed income commentary here>>

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