Now that the moment of another round of Washington ineptitude has passed, the stock market has staged a “post-government shutdown” rally. According to market strategist Thomas Lee of JPMorgan, history has shown equity markets have rallied into the year-end after previous instances of prolonged government shutdowns. Given the public support damage suffered by Congress in the latest go-round, it appears unlikely that the upcoming budget negotiations in early 2014 will be quite so intense. As Anatole Kaletsky of Gavekal wrote, “An army in flight cannot suddenly turn round and mount a successful counterattack. Regrouping a routed army takes months, if not years.” This recent budget battle may have helped financial markets in that it was partially responsible for the delay in Fed tapering. Kaletsky adds that the outline for any potential budget deal in the coming months is rather clear, as the President is “willing to trade some long-term economies in Social Security and Medicare for a Republican agreement to lift short-term sequestration spending cuts.” A budget deal should “lift the cloud of political dysfunction and uncertainty over the dollar” and may create a “coiled-spring effect” for the US economy and equity markets. Per Yardeni Research, the strong performance of the current bull market may be explained by the “Trauma of 2008.” The traumatic experience of the crisis has caused central banks to continue “ultra-easy monetary policy,” while business managers have been slow to hire – resulting in robust profits and margins. In short, this “trauma” has been bullish for stocks.
Stronger signals on the economy have been lighting up more frequently as rail shipments, lumber orders and chemical activity trend higher. According to Cornerstone Macro, these are all signals that closely correlate to the broader economy. Nevertheless, unemployment remains stubbornly high. Although some may argue that low growth is the primary reason, higher unemployment rates may be the result of other factors. Louis Gave explains how economist Wassily Leontief wrote: “The role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors.” We are now seeing this in many other forms. For example, winemakers in Napa Valley utilize technology to replace workers that would otherwise hand sort grapes, according to Michael Shedlock of Sitka Pacific Capital Management. It’s not just a replacement of unskilled workers either. In an effort to control costs in hospitals, some patients undergoing certain out-patient medical treatments may receive anesthesia administered and monitored by a machine, rather than an anesthesiologist, which are far more expensive. A new system called Sedasys is being rolled out for some limited procedures such as colon cancer screenings, according to the Wall Street Journal. Although these changes in technology may not improve unemployment rates, they do improve productivity. Ultimately, the improved productivity supports corporate margins and will be reflected in stock prices.
In a recent interview with Welling on Wall Street, Strategas Research argued that the “runway for equities” appears to be very long, as one needs to “separate out the economy from the financial markets.” They equate the current period to that of the 1960s. In the 1960s, despite “a decade of low nominal growth” and “stock market multiples that moved sideways,” stocks did relatively well. It was a period where investors experienced the first “great rotation,” as institutional investment moved from “trust companies into mutual funds.” Regardless, there will continue to be periods of volatility. As described in a recent Bloomberg article, famed economist (and recent Nobel Prize recipient) Robert Shiller studied how “something beyond fundamentals drives stock fluctuations.” Essentially, stocks are much too volatile to reflect an efficient market. He argued that a “stock price should only fluctuate as the value of future dividends rises and falls” as a stock is an “entitlement to a company’s future dividends.” Market strategist Barry Ritholtz recently wrote how investors have a “tendency to put excess emphasis on short term noise,” which ultimately plays a role in price volatility. When an investor prefers “action over patience,” Ritholtz encourages one to heed his advice – “Don’t just do something, sit there.”
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.
This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates. In preparing these materials, we have relied upon and assumed without independent verifications, the accuracy and completeness of all information available from public and internal sources. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them.
This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. Carefully consider investment objectives, risk factors and charges and expenses before investing.