Cheerfully Optimistic
US financial markets are remarkably sanguine about imminent, new displays of ineptitude in Washington.
Thus, the principal US stock market indices are all up significantly, from the beginning of this year, from a year ago, and from five years ago. Here, for example, are the data (at date of writing) for the S&P 500 index, a broad measure of the stock market: up 4% from December 31, 2012, up 15% from a year ago, up over 4% from the Spring of 2008, and closing in on its 10-year, pre-financial-crisis peak set in the Fall of 2007. Data for the Nasdaq market (the second-largest stock exchange by market capitalization in the world) are even more dramatic - its composite index is nearly 20% above its previous 10-year peak set in late 2007 (albeit well below its "dot-com" bubble level registered 12 years ago). The Dow Transports index, the oldest stock index still in existence, and regarded as a predictor of economic growth, is at an all-time high. The VIX (the CBOE Volatility Index), considered a measure of stock price volatility and referred to as the "fear" index, has dropped nearly 40% in the last 3 days alone, from already low levels. And finally, while there has been recently a greater relative flow of funds into stocks, the US bond markets, where the world keeps showing up to buy American debt, remain strong and stable, that is, prices are historically high, and yields (which by definition fall as prices rise) are near historic lows for all maturities.
Taken together, this is an unusually bullish picture. The Washington "cloud", with another debt-ceiling negotiation next month, massive government expenditure cuts now set for March 1, unless Congress acts (the so-called sequester), and the continuing resolution of the 2013 US budget later in March - all these seem to matter for not. Markets like current fundamentals - corporate earnings are good, labor markets are showing further improvement, the auto and housing markets are stabilizing, with housing prices and starts up, and foreclosures down, sophisticated manufacturing is returning to America as the domestic energy markets transform themselves, China, and even Japan, look brighter, Europe is at least not about to implode (witness the Euro resurgence), and general price inflation is still no where to be found.
Upcoming US government antics are, according to the markets, soap opera. The ever-louder rancor over the next few months will present wonderful stock-buying opportunities. Complacency about the long-term debt position in America is the one, serious underlying threat.