In his latest letter, GSAM Chairman Jim O’Neill takes stock of the state of Washington, the election, the market, and the economy, and comes off worried.
More than $6bn spent, and at the end of this week, much of the status quo in Washington DC is no different than last week. President Obama is re-elected, and the Senate and the House have the same control. If you came from Mars you would think it was madness. If you recall from my last Viewpoint, which was inspired by a rather disturbing visit through Dulles International airport, I feared about the consequences of the status quo. Despite plenty of experts telling me to the contrary it seemed likely that Obama would win, and not much would change in congressional terms. And it seemed to me that this was not a good outcome for early or detailed progress on fiscal issues. When I returned from my subsequent vacation, a quick glance at the S&P charts suggested to me a pattern forming not dissimilar to the one formed in the early Summer of 2012, or more worryingly, that of the Summer of 2011, i.e. the spot price and its 21-day moving average had dropped below the 50-day. For whatever reason – fears about policy gridlock – momentum of the market has turned down.
As I remembered at our CIO call, this is most unfortunate as the ongoing US data has been quite encouraging again. Both the October Manufacturing ISM and payrolls report, published before the election positively surprised. While the Hurricane Sandy’s after effects have been expected to play havoc with much data, ongoing weekly jobs claims continue to decline, and most encouragingly, the underlying trend of continuing claims fell to their lowest level since mid-2008. On top of all this, the September trade report showed a lower than expected deficit at $41.5bn. While some of this reflected real petroleum imports, the strength of exports surprised, and most importantly year-to-date, the deficit stands around $415.0bn, almost identical to that of 2011 despite the recovery in economic activity. As I mentioned last month, this improvement in the US external imbalance (deficit between 3 – 3.5% of GDP) is starting to look more and more structural. From my 40,000 feet, the US is making progress on changing itself.
This is a point we made yesterday. The stock market is getting ugly again (falling to a 3-month low) and yet there really hasn’t been any deterioration in the data.
We put up this chart of the S&P vs. Initial Jobless Claims, two lines that have historically stayed close together, and noted:
it’s worth noting the last time there was a severe break between the two lines was [Summer 2011], around the debt ceiling fight, a scenario which the current fiscal cliff debate harkens back to. Then the market freaked out, but mostly the economy kept on rolling.
If you’re optimistic about the Cliff talks, an opportunity may soon emerge.
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