So far, October is living up to its reputation as the cruelest month for stock exchange traded funds.
However, markets are already looking ahead to November as a deadline looms for a Congressional “supercommittee” to submit a plan to cut the U.S. deficit by $1.5 trillion over the next decade.
If the supercommittee fails to reach an agreement by the Nov. 23 deadline, the consequences could be dire for the financial markets due to automatic spending cuts, notes David Kelly, chief market strategist at JP Morgan Funds. [Stock ETFs Fade After Bernanke Bounce]
“This group of Republican and Democratic Congressmen and women has been distinctly out of the news in the past month. That’s a positive sign – at least they aren’t negotiating in the press,” says ConvergEx Group Chief Market Strategist Nicholas Colas. “Still, Republicans are trying to take military spending – which is slated to bear the brunt of automatic cuts should the supercommittee fail – off the table. Pentagon officials are on record saying that the reductions in spending could increase the national unemployment rate by as much as 1%.”
Democrats on the 12-member panel are taking a tough stand on tax increases due to wariness that Republicans might try to keep higher taxes off the table, Reuters reports.
“My personal observation about the deficit discussions of 2011 is that risk markets (stocks, corporate bonds, commodities, etc.) are deeply worried that Washington needs another capital markets crisis to deliver real answers,” Colas wrote in a note Monday.
The Federal Reserve seems worried by anti-Fed rhetoric from the Republican party, he added.
“This contributed to the FOMC’s decision to skip a full-blown QE3 and will likely keep them on the sidelines until markets are howling for further assistance,” Colas said. “The famous ‘Bernanke Put’ is deeply out-of-the-money, as an options trader would put it.”
Still, Washington appears so gridlocked that a supercommittee compromise would boost markets. “That would be a powerful catalyst for stocks in November, even if capital markets are giving this outcome slim odds just now,” he wrote.