"Kee" Points with Jim Kee, Ph.D.

Debt ceiling debate resolved for now: The debt ceiling has been suspended until February, and as the Wall Street Journal pointed out, debt ceiling increases are often last-minute affairs. For example, 37 of the past 45 increases (covering 6 presidential administrations) have occurred as debt reached 98% or more of the debt ceiling limit (WSJ). It appears that these debt/deficit/debt ceiling confrontations are going to be an ongoing part of the political and investment landscape. At least that seems to be the market’s message (S&P 500), as each showdown has produced less reaction. For example, during the 2011 debt ceiling showdown and US government debt downgrade by Standard and Poor, the market sold off 17 percent from peak-to-trough. Then, heading into the presidential election and the “fiscal cliff” towards the end of 2012, the market sold off about 9 percent from peak-to-trough. Finally, the most recent sell-off from political strife over debt and deficits was less than 5 percent – technically not even a pull-back(!) – and currently the market is at an all-time high.

 

That’s not the only reason markets are up. Global data has also been positive, as China’s economy accelerated to 7.8 percent growth on an annualized basis in the third quarter; up from 7.5 percent in the second quarter. And earnings reports from some big global companies like General Electric have also been positive. The shutdown may distort some of the US data for a few months, but generally the impacts of a government shutdown (less government spending, delays in doing business because agencies aren’t open, fence-sitting on the part of business spending/hiring) are temporary rather than permanent.

 

This is “earnings season,” as companies report their 3rd quarter financial results. So far about 25% of the S&P 500 have reported, and the majority are beating estimates on earnings or profits, i.e. “bottom-line.” But it is topline results – that is, sales growth – that markets are really watching. Expectations are for about 3 percent annualized sales growth, which would suggest that sales and earnings growth have troughed (no longer decelerating) and have begun to accelerate. A number too far below 3 percent will no doubt be a source of angst for the market. I will keep you posted.

 

Finally, the most interesting thing I saw last week: According to an article in the Financial Times, and due to oil and gas extraction technology as well as a more efficient auto fleet in the US, oil imports are down to 35% of domestic consumption from 60% in 2005. That is one of the most miraculous market results I have witnessed in my lifetime.