Valuations and the Shutdown Weigh on Markets

Tech stock valuations and the lengthy government shutdown weighed on markets last week. Uncertainty permeated investors last week as there was no end in sight to the

government shutdown - now the longest shutdown in history. Airline flights across the country were disrupted and consumption possibly took a hit as more federal employees went without pay. In addition, government shutdowns bring a halt to federal spending, reducing outflows from the Treasury General Account. This has caused at least $700 billion in liquidity to be drained from the banking system and the Fed's Repo facility. On the bright side, history shows that equities tend to perform well after government shutdowns, with average 1-year returns following shutdowns at +13% on average for the S&P 500.

So far, 91% of S&P 500 companies have reported earnings for the third quarter. At least 82% have reported earnings above estimates and 77% have reported revenues

above estimates - both above the 10-year averages. In terms of earnings growth, the third quarter saw earnings explode higher. The reason this is important is that earnings drive stock prices, so as long as earnings continue to grow, stock prices are at least somewhat justified. Where we go from here is more up in the air as technology stock valuations have become a concern.

Though the shutdown has delayed several key economic releases, the Fed continues to receive sufficient data points to suggest the economy is still on track for positive growth.

The third quarter GDP release has been delayed, but the Atlanta Fed has projected Q3 GDP to come in at +4.0% - a robust number. The New York Fed is projecting 4th quarter GDP to come in at +2.1%, lower than Q3, but still solid. Corporate stock buybacks are now in full swing and there is some glimmer of hope the shutdown may be close to an end. The Senate reached a tentative deal on the resolution to re-open and will reconvene at 11 a.m. today for a final vote. If adopted, the House would vote on the full measure on Wednesday. We now wait with baited breath.

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