Highlights for the week ending October 11, 2013:
A Macro View
Following last week’s drubbing resulting from the effects of the partial government shutdown, it was an eventful week in the financial markets, with the Dow Industrials’ gaining 323 points on Thursday, the largest advance in terms of points since 2011. The S&P 500 also rallied yesterday, and has now erased more than half of the decline experienced since it closed at a record high on September 18th. Meanwhile, gold plunged to a three-month low as investors are cooling to the yellow metal as a store of value.
The key driver of these moves was obviously the news this week that the White House and House Republicans seem to have stepped back from the brink of default, and are engaged in discussions to address both the debt-ceiling limit and funding of the government, thereby ending the partial shutdown. While no deal seems to be imminent, investors seem heartened that the sides are negotiating.
With some movement in the debt-ceiling and budget talks, focus is likely to pivot back toward fundamentals. The earnings season has just begun, with JPMorgan and Wells Fargo two of the larger firms to have reported so far. According to Bloomberg, 31 companies in the S&P 500 have reported third quarter earnings, with 22 reporting higher earnings from a year ago.
The other news of the week that may have a greater impact on the markets down the road was the announcement that President Obama has decided to nominate Janet Yellen as the Federal Reserve chairperson. Ms. Yellen reportedly hadn’t been the president’s first choice for the position – he favored economist Larry Summers – but most economists believe that the transition from Ben Bernanke to Ms. Yellen should be a smooth one, as they have similar views on employment, inflation and quantitative easing. Making the transition somewhat easier at the beginning is the fact that some of the Fed’s policies are currently tied to inflation and unemployment rate thresholds. However, at some point soon into her tenure Ms. Yellen will need to reduce the size of the Fed’s quantitative easing program, and will likely want to make changes to the way the Fed communicates and sets expectations.
Economists generally believe that Ms. Yellen’s policy leanings are toward addressing the situation in the labor market, and will aggressively try to steer the economy to full employment. Such a focus might mean accepting somewhat higher inflation than the Fed’s target of 2% in an effort to accelerate growth. Many economists also believe that she will be even more dovish than Mr. Bernanke in terms of when to begin raising interest rates, and are now forecasting that the Fed may not begin raising the fed funds rate until perhaps 2016.