How is the Stock Market Reacting to the US Debt Ceiling?

In the midst of the angst that this country is in, when the polls show that nobody likes ANY politician, we sit glued to those shows that incessantly talk about the ominous results that the stalemate on the US debt ceiling talks could have on the US and the rest of the world.  But instead of feeling that angst, let's remember, this is the stock market's reaction over the last two months - surprisingly good.

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In fact, since that bottom on June 16, 2011, we have seen the S&P 500 move up 6.5% from the inter-day low to last Friday's close.

That is good, but as we're seeing earnings coming out, it's obvious that the market is not keeping up with the increasing earnings.  So far, earnings season has been very strong with over five times as many S&P 500 firms reporting positive surprises than those that have disappointed.  It is mind-boggling to me to see the amazing strength in earnings, and see non-financial corporations have their balance sheets in the best shape in many years, even as the consumer now has monthly debt service levels back to "normal" levels, and the government seems to be in a stalemate teetering on the edge of having their debt rating reduced.  You just wonder...

Yet, so far this year, it seems that the main obstacle has been the evolution of the banking problems, which is tied almost exclusively to the housing situation - not the consumer, not manufacturing, not transportation, and not the price of commodities or inflation.  Yet, while the S&P Banking Index is down quite a bit for the year, it has more recently been tracing out a potentially favorable pattern, which you can see in the chart below.

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But overall, our Asset Allocation Model is still in the same position this morning, as Monetary Conditions and Stock Market Valuation remain strong, while Investor Psychology grows increasingly negative.

Click here to read today's full Market Comment.

Don Hays

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