October 7th, 2013 Market Update

With no movement over the weekend on the US budget, markets are continuing to retreat and have again overnight in Asia as market there were off about 1.25%.  Europe at midday is showing declines of 0.75% and US futures are lower by about three quarters of a point.  Canadian futures are about a half a point lower.

It would seem that both side continue to dig in with the right side of the aisle playing a game of chicken with the left.  As the debt ceiling deadline gets closer, we are now getting comments from some of the biggest holders of US debt, namely China at $1.2Trillion and the Euro Union at a little under that number.  The politics of the day are no longer an issue as far as the stake holders are concerned.  The term, get it done seems to be the message that is being broadcast across globe to the Americans.

Gold is trading higher this morning by about 8.00 to 1318, oil is off a buck at 102.87 and the loonie is off a third of a cent to 96.84.  Debt markets are rallying on the budget impasse with the US and Canadian 10 year bonds are yielding 2.61% and 2.55% respectively.

Our US strategist Tony Dwyer makes some interesting points on the current situation which I have included below:

  • The government shutdown and heated debt limit debate should push any possible “tapering” into the first quarter until the Fed is able to forecast the economic impact.
  • The trend of the economic data remains positive with Consumer Confidence, Housing, Employment, and debt service ratios at/near the best levels of cycle. The steepness of the yield curve and historically narrow corporate spreads suggest years of growth ahead.
  • Bank lending standards continue to ease as manufacturing expands, suggesting business spending a long way away from turning negative.
  • Q3/13 EPS reporting season is beginning with consensus expectations of 4.5% growth vs. a year ago. Every reporting season since Q1/09 has seen final results ahead of beginning of season expectations by an average 5.5% (2.8% over past four quarters), suggesting upside to EPS over coming weeks.
  • The valuation expansion that began in November 2011 continues to track the past two non-recession valuation expansions, suggesting our 2014 SPX target of 1,955 may be overly conservative for both time and price. Our target is based on 17x our 2014 estimate of $115. We view both our multiple and EPS assumptions as very conservative. The government shutdown and debt limit debate should push out expectations of Fed “tapering,” which keeps the yield curve steep and long-end near current levels.
  • While absolute corporate credit yields are off the low, as is typical at this point in the cycle, the Investment and Speculative Grade debt-to-UST yield has moved back to the best levels of the current cycle.
  • Corporate credit new issuance continues at a record pace. That is going to fund a lot of buybacks, M&A and other pro-equity moves.
Kenneth A. Dick, BA, CIM, CFP, FCSI

Branch Manager & Portfolio Manager | Independent Wealth Management

Canaccord Genuity Wealth Management