US stocks ignore Washington drama, but fears remain

The US stock market was left almost unscathed by the fiscal standoff in Washington, with the S&P 500 hitting an all-time high Thursday, as the curtain fell on the political drama. President Barack Obama early Thursday signed an 11th-hour deal passed by both chambers of the Congress to fund the government through Jan. 15 and raise the debt ceiling until Feb. 7. Analysts said the U.S. equity market displayed impressive resilience in the face of the fiscal stalemate, but there could be continued volatility, as the lull in fiscal bickering was only temporary and quarterly earnings were disappointing. The broad-based S&P 500 rose to 1,733.15 points Thursday, passing its previous high set just a month ago. The tech-heavy Nasdaq Composite Index hit a fresh 13-year high of 3,863.15 points after Thursday's close. The Dow Jones Industrial Average also staged a stunning recovery from a triple-digit loss at the open to finish just 2.18 points lower. Given all the supposed fears of a default, "stocks have not flinched," Mark Newton, chief technical analyst at Greywolf Execution Partners Inc., told Xinhua Thursday. "We really haven't experienced any sort of volatility like we had in previous shutdowns, where the market was down 4 to 5 percent, like we saw back in the late 70s," he said. "I just see it as being bullish, but you have to be to some extent a little cautious about how rapidly things have moved up when the greater issues still haven't been resolved," the analyst said The CBOE Volatility Index, the best gauge of fear in the market, pulled back nearly 35 percent in only eight days. Newton said the equity put-to-call ratio as a measure of sentiment was down to its lowest level in at least a year. "So there is really no sign of fear whatsoever," he said However, the fiscal impasse could hit consumer spending. Alan Valdes, director of floor operations at DME Securities, said: "It couldn't have come out at a worse time because shopping season starts in about two weeks. I think you can see that drag on consumer spending this year, which will hurt the retailers." Most traders believe that, as a result of the fiscal fiasco, the U.S. central bank will not taper the third round of quantitative easing until 2014. "They are not going to taper until 2014 the earliest. And I'm thinking maybe June (of 2014)," Valdes said. "There's a lot of optimism right now in the market, a lot of complacency," said Newton, adding people felt the shutdown would postpone the tapering and the Fed would have its foot on the gas with (Fed Vice Chairwoman Janet) Yellen coming in." But economists from JPMorgan Chase & Co. do not rule out the possibility of a taper in December this year. "There is about a 30-percent chance the Fed moves then (in December)," said JPMorgan Chief U.S. Economist Michael Feroli in a note Thursday. "I definitely think there is going to be more volatility in the market," J.Streicher Co. managing director Mark Otto said. "These battles in Washington and reports that are going to continue to come out in the next couple of weeks or months are definitely going to play out in the market as well," he said. The temporary fiscal deal is by no means a cure-all remedy. It is at most a painkiller, as the deal failed to address many of the contentious issues and set up another fiscal bomb to go off in a few months, thus keeping many investors on the sidelines. Valdes said he believed traders would wait until the next deal came up. "They will be trading intimately, but I don't think they are going to put any really big bets," he said. Meanwhile, analysts noted weak corporate earnings in the third and fourth quarters would add more volatility to the market. "Revenues are going to be disappointing. Forward looking guidance into the fourth quarter is certainly going to look ugly this time and is definitely going to be tempered by the government shutdown," Otto said. "I think there is a greater-than-average chance we'll probably show some sort of a stalling out, and probably the start of a minor correction of stocks that might last until the end of the month, potentially into early November," Newton said.