Budget, Debt, Fed

The preoccupation in the stock and bond markets at this time is with what is happening in Washington. The mixed economic reports that came out last week indicate that the Federal Reserve will likely make no changes to their bond and mortgage buying program until very late this year or early next year. This has sent bond prices up as yields have fallen. At the same time, the equity markets are justifiably worried about what Congress is going to do to resolve the budget and Federal debt ceiling issues. If the debt ceiling issue is not resolved, the government will run out of funds by the latter part of October. Currently, the concern is with a budget resolution by October 1^st, the beginning of the next fiscal year. The lack of a resolution will result in closure of non-essential government services and the inability to pay Social Security and Military Pension benefits. The repercussions of this inaction would have a detrimental effect on the entire economy. This concern has lead to a downturn in the stock market. The short-term outlook is cloudy. In the long term, I believe the stock markets in the U.S. will do well if the economy continues to grow. Stocks trade at a multiple of earnings. On a trailing 12 month basis, the market’s current price-to-earnings ratio of about 19 is a third above its long-term average. This has occurred because earnings growth has been tepid while stock prices have gone up significantly. The expectation is that we will see greater earnings growth in the future. Shutting down the government could change this assessment. Bond markets will have to adapt to increasing interest rates over the next year or so, but should subsequently be fine.

Ed

From Damascus to Jerusalem

With all that is going on in Syria, I’ve been asking people how far they think Damascus, Syria, is from Jerusalem? One great answer I received was “it must be either very close or far away.” Apparently we are not much for geography in the United States. Most of us recognize that the Middle East is a very dense area of the world, but just how dense? In answering my basic question you can look in the New Testament, where Saul, soon to be Paul, has an encounter on the road from Jerusalem to Damascus. This indicates that, even 2000 years ago, it was possible to travel between these two cites on foot. The answer to my question is 135 miles. But this belies the question of density in the Middle East. Some interesting distances: between Damascus and Cairo, Egypt: 382 miles; Nicosia, Cyprus: 204 miles; Tel Aviv, Israel: 133 miles; Amman, Jordan: 109 miles; and Beirut, Lebanon: 55 miles. These are all capital cities in the Middle East and they are very close to each other. The fallout of the civil war in Syria on the countries surrounding it has lead to disruptions, as millions of people have fled from Syria to these nations. Any action that is taken in Syria will undoubtedly have repercussions on countries in close proximity, and we just don’t know where this may lead. Generally, this type of tenuous situation is not good for stock markets. The stock markets in the U. S. have shown no apparent significant downturn--yet! The Middle East still supplies about one-third of the oil that is used in the U.S. A disruption to the supply line, or worry about such a disruption, could send oil prices skyrocketing. Such an event would have a negative impact on the growth of the U.S. economy, with more consumer dollars going for gas and less for consumer products. While we are in the stages of becoming self-sufficient in energy, our infrastructure, to make this possible, is not yet fully in place. Today, on the front page of the Wall Street Journal, it was reported Secretary of State John Kerry, in London, 2855 miles from Damascus, in an off-the-cuff remark, suggested that President Bashar al-Assad could avert an attack by promptly handing his chemical weapons to the international community. Moscow, 2184 miles from Damascus, declared its support and quickly got Damascus on board. In Washington, DC, 5877 miles from Damascus, the vote on action in Syria became muddled. No matter the outcome, the Middle East does have an impact on the markets and citizens of the U.S.   

Ed Mallon