Stocks and Treasuries Rise as Economy Slows

Despite the disruption of a two-week shutdown and media warnings of impending financial doom if the debt ceiling was not raised, the stock market and the Treasury market have done surprisingly well. Both, of course, have more to do with continued government influence than with economic drivers.

Stocks and Treasuries have once again reached rather frothy levels as the Federal Reserve is largely seen as continuing its monthly injection of $85 billion in cash through the purchase of Treasuries and mortgage bonds.

Corporate earnings have been another primary driver of stocks as 76% of S&P 500 companies reporting so far have exceeded earnings predictions, while 53% have beaten sales estimates. The S&P 500 and the US Total Market indexes are up 4.3% for the month and the 7-10-year Treasury Index is up 1.2%.

This week’s reports show the real economy may be slowing a bit more. The stalwart of the recovery, manufacturing, as the Markit Economics released its preliminary index showing that October’s pace slowed to 51.1, more than forecast and below September’s mid-month and final readings of 52.8. Europe also slowed, but China showed more strength than expected –  a sign the recovery there continues.

Today’s report of orders for durable goods was marginally negative without aircraft orders. The transportation segment spiked 12.3% largely due to aircraft. But excluding transportation, durable slipped 0.1% which follows a decline of 0.4% in August.

Construction spending was a bright spot this week as outlays advances 0.6% in August following a 1.4% increase in July. On a year-ago basis, construction was up 7.1% in August, compared to 6.2% percent the month before according to Econoday.

On the consumer’s side, sales of existing homes were down 1.9% in September and flat in August. Rising mortgage rates are a primary cause and have increased since talk in June of the Fed’s tapering of their mortgage buying program known as QE3. Poor job growth has also bee a detractor. Total payroll jobs in September advanced 148,000, following 193,000 for August and 89,000 for July.

These sluggish numbers combined with the dysfunction and downright scariness from Washington have put a big dent in confidence. The government’s consumer sentiment index fell to 73.2 in the final October reading, down from 75.2 at mid-month and down from 77.5 in final September. The weakness according to Econoday is centered in the expectations component which fell to 62.5 vs. 63.9 at mid-month and vs. 67.8 in final September. The temporary resolution in Washington didn’t give any boost with the implied reading for the last two weeks in the low 60s and another 2-year low for this report. Folks are getting wise to Washington’s brinkmanship.

The best measures of the consumers’ confidence are coming in the next couple of months as we approach the Christmas buying season. By early December we will have a pretty good idea of whether our economy is improving or slowing. Fortunately, Washington is not scheduled to muddy the waters until mid-January.