Business

10.01.13

Washington Drama Makes October a Confusing Month for Investors

With a full slate of important economic dates, rising Washington dysfunction, and a worrisome legacy, October may spook investors long before Halloween.

Halloween isn’t the only thing that has people spooked about the month of October.

Historically, superstitious investors have feared the 10th month of the year. Why? On October 28 and 29, 1929—a.k.a. Black Monday and Black Tuesday—a stock-market crash helped kick off the Great Depression. Then, nearly 60 years later, on October 19, 1987, also known as Black Monday, stock markets worldwide crashed again, causing the Dow Jones Industrial Average to shed 22.6 percent in a single day.

But in 2013, thanks to politics and a jam-packed calendar, even market watchers who are focused solely on the present and future may need some blood-pressure medication.

The month is commencing with a bang as the government shuts down after failing to pass a budget to fund the government. Members of a certain segment of Congress may give a whole new meaning to Sartre’s famous quote that “Hell is other people.” And while markets at the moment seem to be reacting with a collective ‘meh,’ this may be because Wall Street has priced in a significant amount of Washington ineptitude and dysfunction.

But if the shutdown continues, other dates on the calendar will bring consternation. The market and other entities that affect the market (like the Federal Reserve) react to a lot of government data. Information is like oxygen to traders. And data collected and disseminated by the government is hugely important. Every Thursday, the weekly jobless claims by the Bureau of Labor and Statistics provide an ongoing measuring stick of the health of the labor market. But as of Tuesday morning, the BLS website is no longer being updated.

On Friday, the monthly jobs report, which has a big impact on the Fed’s decision about its multibillion-dollar bond-buying program—and typically moves the markets significantly—is not likely to come out.

Then, beginning next Tuesday, October 8, earnings reports for the third quarter begin to come out. In the absence of macroeconomic data, earnings reports by individual companies and sectors can inject a heavy dose of volatility into the markets. Over the past few years, corporate profits and stocks have been on an epic run. But all good things come to an end. And with economic growth slowing around the world, it’s an open question as to whether corporate America can continue to light up the scoreboard. As Henry Blodget recently noted, earnings are quite high by historical standards.

But perhaps the biggest date of the month is October 17. That’s when the U.S. government will pierce the debt limit, thus raising the potential of a debt default, an undermining of the full faith and credit of the world’s largest economy, and uncorking a miasma of economic chaos. Expect a jittery market in the run-up, particularly since it is unlikely extremists will be able to control their heated rhetoric. And if the debt limit is not raised, and the U.S. is forced into default, what lies on the other side is hard to predict.

Meanwhile, as the month trudges along, the shutdown that began Tuesday will wreak an economic toll on U.S. companies—and that’s bad for stock. The changes may be imperceptible at first. But over time, the impact of hundreds of thousands of furloughed workers will be felt. According to Robbert van Batenburg, director of market strategy for Newedge, the estimated impact will be $300 million a day. Should the shutdown last for two weeks, U.S. economic growth in the fourth quarter could fall by 0.5 percent.

And if we make it through the shutdown and the debt-ceiling limits, investors can look forward to the 29h and 30 of October, when the Federal Reserve has its two-day policy meeting. During this meeting, depending on the perceived strength of the U.S. economy, the Fed will decide whether or not to begin tapering its expansive monetary policies.

Fasten your seatbelts.