All Eyes on Capitol Hill

The major benchmarks overcame an early sell-off last week, to end flat to modestly higher. On Monday, the S&P 500 Index recorded it biggest daily drop since May 12 and briefly dipped below its 100-day moving average (a closely watched technical level). Longer-term bond yields rose sharply over the week, helping financial stocks anticipating improved lending margins. Energy stocks also outperformed within the S&P 500, while utility shares lagged.

The decidedly downbeat start to the week appeared to be due to several factors. Primary among them were fears that a possible default by China’s second-largest property developer—and the world’s most heavily indebted one—might set off a global financial “contagion” similar to what followed the collapse of Lehman Brothers in September 2008. Stocks regained a large portion of their losses on Wednesday, as the developer, Evergrande, delivered on its covenants. That said, the risk of default is still very real for Evergrande, and the markets will be watching closely.

The other closely watched event of the week was the Federal Reserve’s two-day policy meeting that concluded Wednesday. As was widely expected, policymakers announced that they would soon consider tapering the central bank’s purchases of Treasuries and mortgage-backed securities, a move that would reduce some downward pressure on longer-term interest rates. In his post-meeting conference, Fed Chair Jerome Powell reiterated that he would be looking for continued improvement in the labor market before acting, although he did not need to see a “knockout” report for September.

The Fed also released its quarterly survey of individual policymakers’ forecasts of future official short-term interest rates. The survey showed a small increase in their median rate expectations, which some investors interpreted as a modestly hawkish signal. According to the Federal Open Market Committee’s (FOMC’s) updated Summary of Economic Projections, officials’ projections for the timing of an interest rate liftoff are now evenly split between 2022 and 2023. Additionally, a majority of officials now anticipate at least three quarter-point rate hikes by the end of 2023.

The week’s jobs data appeared to defy hopes for a resurgence in the labor market, with first-time jobless claims rising to 351,000, well above consensus forecasts and the highest number in a month. IHS Market’s survey of both manufacturing and services sector activity in September also came in modestly below expectations but still indicated healthy expansion, especially in the former. Conversely, housing data mostly came in on the upside, with both housing starts and permits easily surpassing expectations. New home sales in August also hit their highest level (740,000) in four months, although they remained well below their peak a year earlier (977,000).

The biggest item on the near-term horizon is the political wrangling surrounding the debt ceiling and the Administration’s spending package. Where these spending and associate taxation plans “land” will undoubtedly have some impact on the markets (and the pocketbooks of many). Although tax increases (real or perceived) never feel good, we have enjoyed a historically low tax environment for quite some time. We are also reminded that, whether we like it or not, this is the work the Lord has ordained for our human authorities to complete in these days, “This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor” (Romans 13:6-7).

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

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