For the week of September 23 - September 27Stock Markets
While the Dow Jones Industrial Average and the S&P 500 both declined by over 1% last week, the Nasdaq and small cap Russell 2000 both finished slightly higher. Both the S&P 500 and the Dow Jones industrial Average came off record highs reached the previous week with 5 consecutive days of negative returns that ended on Thursday. For the S&P 500, this was the longest such streak of losing days so far in 2013. The two big news stories this week concerned the US Congress and the Federal Reserve. One of the main causes for the market's decline and a spike in volatility was the increasing likelihood that the Congress wouldn't be able to pass a budget before the new fiscal year beginning Tuesday October 1st. While this would lead to a government shutdown that would reduce demand in the economy, a much bigger worry is that the two parties won't agree to a compromise to raise the debt ceiling. The Treasury Department recently said that it will run out of money to pay all the government's bills on October 17th. While many pundits view the standoff over the budget and debt ceiling as political theater, markets are reacting, as the credit default swap spread on US Treasuries has increased to its widest level since the August 2011 debt ceiling showdown and S&P's downgrade of the US. Outside of events in Washington, signs are pointing in the right direction for the US economy. Both durable goods orders and new home sales (421,000) came in higher than expected for August. New unemployment claims for the week came in below forecasts are close to a 6 year low. The final estimate for second quarter GDP growth matched previous estimates of an annualized 2.5%. Personal income increased by 0.4%, while home prices increased by 1.0% according the FHFA numbers and 0.6% according to the S&P Case-Shiller survey. Other indicators posted minor declines; Consumer sentiment fell to 77.5, Consumer confidence dropped to 79.7 and the Markit flash PMI declined to 52.8.Bond Markets
Yields on US Treasuries fell and prices increased both because of the Federal Reserve's comments pointing to a looser monetary policy and ironically, because of fears of a US government shutdown or even debt default. September was the first month of positive returns for Treasury investors since talk of tapering began in April. Once again, there was a large amount of new issuance for investment grade corporate bonds and September looks like it will be record month in this regard. There were also a lot of new deals in high yield bond issuance last week, but issuers are starting to take advantage of strong investor demand by overpricing deals. Demand for municipal debt increased and credit spreads over treasuries narrowed, after widening in August. Only $4 billion of new municipal debt was issued this past week, so strong investor demand has translated into higher prices and increased activity in the secondary market. Finally, after three straight months of outflows, emerging market debt funds are starting to see inflows in response to the Federal Reserve's dovish monetary policy and also strong manufacturing data that came out of China this week.Sources:*Indexes are from Reuters and Yahoo! Finance 4pm closing data*Gold prices are from EcoWin and J.P. Morgan Asset Management*Treasury rates are from Bloomberg.com*Municipal and high yield rates are from Barclays Capital
Past performance is not indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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