Heading into this week, the stock market looked ready to follow the script one or the other of the weekend’s big opening films: the Tom Hanks vehicle Captain Phillips or Robert Rodriguez’s Machete Kills.With the former, brave investors are rescued at the last minute from the pirates in Washington D.C. In the latter, it’s a debt-ceiling induced bloodbath.
Hopper Stone, SMPSP At the beginning of the week, it looked like a market massacre was on its way. The Dow Jones Industrials dropped 2% on Monday and Tuesday as it looked like the budget showdown would drag on into the debt ceiling and no one was giving ground. But the rescue came on Thursday as Republicans and Democrats started, you know, speaking to each other and the market soared 2.2%.
So Captain Phillips it is. The Dow Jones Industrials gained 1.1% to 15,237.11, avoiding a three-week slump, while the S&P 500 rose 0.8% to 1,703.20. The small-cap Russell 2000 jumped 1.4% to 1,084.32.
Note that a deal hasn’t actually been reached yet, and there’s always a chance that the “good will” that currently envelopes both sides could deteriorate over the weekend. Deutsche Bank’s David Bianco asses the possibilities:
We believe S&P 500 likely dips back down to 1650 or lower if a deal is not announced by Monday, October 14th, but not under 1625 as a deal should be announced before October 18th, Treasury’s deadline for risk to meet all obligations. We believe Secretary Lew’s testimony [Thursday] morning puts additional pressure to get a deal done by Friday, October 18th. We continue to see risks of missed interest payments as nonexistent and would use any weakness to buy non-financials.
Citigroup’s Tobias Levkovich says investors are already looking past the current showdown to better times in 2014:
While one might have thought that the fiscal standoff in Washington, tapering delays and even some disappointing trends in several emerging economies would undermine investor enthusiasm, our latest quarterly institutional investor survey of nearly 70 client respondents conducted over the past week showed an entirely different perspective. In particular, clients expect the S&P 500 to climb further in 2014, with a weighted average target of 1,806 alongside increasing their 2013 objective to 1,704 versus 1,664 when surveyed in July.
What could give stocks a boost? JPMorgan’s Thomas Lee and team suggest it could be third-quarter earnings:
We…expect 3Q earnings to be a positive catalyst in coming weeks with EPS set to expand in high-single digits—the best growth seen since 1Q12. Already top-line growth has been showing steady improvement since 3Q12 (trough), particularly if investors see through the drag created by the Energy sector (down double-digits). Given the industrial production and manufacturing lifts seen in both the US and Europe, we would also expect cyclical visibility to improve.
In fact, some of the biggest movers this week were earnings related. Alcoa (AA) got things kicked off on Tuesday–despite its exclusion from the Dow–when it beat earnings handily. It gained 4.5% to $8.32 this week. Safeway (SWY), meanwhile, gained 6.7% to $33.75 after terrible earnings were trumped by asset sales. No such luck for Fastenal (FAST), which plunged 6.3% this week after it missed earnings by a penny.
And save a spot in your hearts Tower Group International (TWGP), which dropped an S&P-1500 worst 41% after the insurer had to set aside far more cash to cover losses than investors had expected, and Ariad Pharmaceuticals (ARIA), which plunged 78% after the FDA halted one of its drug trials because the medicine in question was too dangerous. They serve as a reminder that no matter the shenanigans among politicians, fundamentals will almost always have the last say.
No machete needed.
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