If the shutdown ends without disaster, investors might want to prepare for a possible rally in December. However, writes MoneyShow's Jim Jubak, also of Jubak's Picks, then old worries, like China and the Fed, might creep back into the picture.
It's hard to take your eyes off the government shutdown/debt ceiling crisis in Washington for the same reason we rubberneck at a car crash:
Disaster is fascinating.
But let's pry our eyes away for the moment and look further down the road.
Assuming this crisis does get resolved short of financial Armageddon—and I think it will, although probably only after a close call with a US debt default badly rattling global financial markets—then what?
Let me try to look ahead at the rest of the year and into 2014 to see what's likely to happen in the markets.
First, and I think we're all agreed on this, we get a relief rally whenever this mess is over. (Of course, this almost universal belief in a relief rally may be the reason stocks haven't fallen very far and that the markets haven't created very many bargains.)
Ready for the rally?
We've already seen a good example of this at the end of last week, when optimism that the White House and House Republicans were close to a deal soared. We got a very impressive 2.2% rally in the Standard & Poor's 500 (SPX) on Thursday, October 10, and a decent follow on of 0.63% on Friday, October 11.
Those markets and stocks that had been hit harder by fears of a US default, and by the consequent flight to safety, rebounded even more strongly than the US markets. This was particularly true for emerging markets, which had suffered their usual relatively larger decline, when fear increases among investors—even when these countries aren't the source of the fear. The iShares MSCI Indonesia ETF (EIDO), for example, rose 3.6% on October 10. The iShares MSCI India ETF (INDA) climbed 3.2% and iShares MSCI Turkey ETF (TUR) was up 2.8%.
How long the relief rally runs and how big it is depends on how quickly the economic fears that were preying on the market's mind return to the front of investors' thinking. Remember back before the US budget and debt ceiling crisis? The fears then were 1) how slow growth might get in China, and 2) the US Federal Reserve's inevitable move to begin tapering off its $85 billion in monthly purchases of US Treasurys and mortgage-backed securities.
Rally killer No. 1: China doubts
Over the weekend, China's government announced that exports unexpectedly fell in September. Exports dropped 0.3% from September, 2012. Economists surveyed by Bloomberg had expected 5.5% annual growth in exports. In August, exports had climbed at a 7.2% annual rate. (Imports climbed 7.4% in September, more than economists had forecast.)
The worry, you'll remember, is that China's economic growth will fall below the government's target rate of 7.5% for the year. Last week, China's Premier Li Keqiang said that China's GDP had grown by more than 7.5% in the first nine months of 2013.
It's unlikely that China's official data will show any deviation from the government's goal in the run-up to the November meeting of the Communist Party's Central Committee that will set economic policy and discuss how to integrate the country's economic policy and socialism with Chinese characteristics. The official data is extremely unlikely to rock the boat before that meeting, but whether or not that data is reliable is another question. And if it isn't, the true growth rate of the Chinese economy will show up in the performance of the global economy, whatever the official Chinese numbers say. A forecast that China's growth will miss the government' target was a key reason that the International Monetary Fund cut its projection for global 2014 growth to 2.9% in 2013 and 3.6% in 2014, from a July forecast of 3.1% in 2013 and 3.8% for 2014.
On the evidence of what happened earlier this year, when fears of lower-than-expected Chinese economic growth hit emerging markets hard, I think a return of those fears would cut into any emerging market rally. Worries about the speed of China's growth would also put downward pressure on commodity economies and their stocks as well, and could revive doubts about the speed of any economic recovery in the eurozone.
Rally killer No. 2: The Fed's next move
Second, at some point, markets go back to trying to predict when the Federal Reserve will begin its taper. Markets moved up very strongly in September as the markets increasingly convinced themselves that the US economy was weak enough and the situation in Washington uncertain enough to put off any taper on the Fed's asset purchases into October or later.
This view that was vindicated when the Fed surprisingly didn't taper at its September 18 meeting.
Time to raise some cash