Resilient Markets, Indecisive Politicians

Weekly Update – January 22, 2013

Markets closed out another positive week, shrugging off lackluster consumer confidence and
moderate earnings reports to hover around multi-year highs. For the week, the S&P 500 gained 0.95%, the Dow gained 1.2%, and the Nasdaq gained 0.29%.[i]

In Washington, Congressional Republicans backed off from a debt showdown against a
resolute President Obama that could have risked a government default on debt. Republicans said they were prepared to raise the debt ceiling and allow the federal government to borrow operating expenses for the next three months, kicking the fiscal can further down the road.[ii]

To be frank, we’re frustrated with Congress’ inability to make hard choices about spending
and debt. Allowing the U.S. to fall into default would be catastrophic, given that the world treats U.S. government debt as essentially default risk free. Despite their promising rhetoric to use the debt ceiling debate to force widespread fiscal reform, many politicians seem to have abandoned that position in favor of baby steps.[iii]

Federal Reserve Chairman Ben Bernanke spoke on Monday, showing support for the fiscal
cliff deal reached on January 1, but emphasizing that lawmakers still need to come to an agreement over the debt ceiling. The chairman also claimed that the Fed’s unusual December move to tie monetary policy to unemployment and inflation targets was designed to provide financial markets with greater clarity.[iv]

Earnings reports show that the final quarter of 2012 ended well, with many firms
reporting better-than-expected (but not mind-blowing) results. However, business leaders are still cautious, noting that the debt ceiling debate and uncertainty over potentially higher corporate taxes clouds their 2013 outlook. On the positive side, many firms are bullish on the U.S. economy and are confident that trends show an ongoing recovery.[v]

In a rare confluence of events, Monday was both a national holiday and the inauguration
of President Obama’s second term, starting the week off fairly quiet for markets. There will also be relatively few economic reports released this week, meaning that traders will turn their attention to remaining earnings reports from firms like Google (GOOG), Starbucks (SBUX), and McDonald’s (MCD). Investors will also be paying close attention to new reports about the strength of the housing market, which are widely expected to show a continued recovery.[vi]






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