3 Stories in the global economy that should not go un-noticed
The big news last week was that the federal government shut down on Tuesday, October 1 when Congress would not pass a 2014 budget bill. Since many federal agencies require their funding to be renewed each fiscal year, they were forced to shut down, furloughing 800,000 federal workers, and causing disruptions in services across the country.
So far, markets have largely shrugged off the shutdown as part of business as usual in D.C. However, as we head into the second week of the federal shutdown, uncertainty is rising. Currently, Congress appears to be at an impasse, and while the shutdown will have limited effects on our $16 trillion-plus economy, investors are starting to worry about the debt ceiling and a possible U.S. default.
It’s important to keep the current situation in perspective. There have been 17 federal government shutdowns since 1976 and none have resulted in long-term damage to markets; in fact, on average, markets had gained 1.1% one month after the end of the shutdown, as investors took advantage of the selloff. While the past doesn’t predict the future, it’s important to note that we’re not in uncharted waters yet and the long-term effects of previous shutdowns have been negligible.
Markets finished last week slightly down—the S&P 500 fell 0.07%, the Dow lost 1.22%, and the Nasdaq increased by 0.69%.
Here are the 3 stories this week that rose above the noise:
IMF Cuts Global Outlook
The International Monetary Fund (IMF) cut its global growth outlook for this year and next and warned that a U.S. government default could damage the world economy. The IMF now expects global growth to total 2.9 percent this year and 3.6 percent next year compared with its July predictions of 3.1 percent this year and 3.8 percent for 2014. It sees emerging market economies growing at 4.5 percent this year, 0.5 percent less than three months ago.
Positively, the IMF acknowledged that Europe is coming out of its recession and the United States continues to benefit from its ongoing housing recovery. Elsewhere, Ned Davis Research projects a very low chance of recession in the United States (less than 1 percent probability based on individual State conditions) and only a 27 percent chance of a global recession.
Money Talking: The First Economic Victim of the Shutdown
Rana Foroohar of Time highlights the potential negative impact the government shutdown may have on the housing recovery. A large percentage of employees in the Federal Housing Administration are currently furloughed, which may create a bottleneck in the mortgage process and slowdown the housing recovery.
Additionally, lenders need to process data through the Social Security Administration, IRS and HUD. According to Mortgage Bankers Association David Stevens, there is “confusion and fear among borrowers about whether they will be able to close on a home purchase or refinance.”
A Lonely Housing Bear Predicts a Big Tumble
In a sign of just how much sentiment toward the housing market has reversed in the past few years, a Bloomberg article details one of the few widely followed real estate analysts that currently has a bearish outlook.
Although we do not view his prediction of a 20 percent broad-based decline in housing values as a likely outcome and we remain somewhat optimistic about the housing recovery, the issues discussed in the article are potential headwinds worth considering and the skepticism surrounding any bearish arguments suggests investor sentiment may have become a little too optimistic about the outlook for home price appreciation.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
