Since my last (July 21) blog entry, “Push-Pull Continues,” I have spent much of my time reviewing the favorable and unfavorable conditions currently limiting appreciation in the capital markets. Corporate earnings continue to be robust with over 80% of the 240 S&P 500® Index companies that have reported earnings posting a positive EPS surprise. Despite a pause in economic growth, corporations continue to execute and reward shareholders.
Unfortunately U.S. politicians do not understand that “silence is golden.” Both the Republicans and Democrats are publicly debating their debt ceiling positions in the mainstream media. Historically, investors dislike the ugliness of our political system being placed on their breakfast and dinner tables. However, that is exactly what has occurred.
I doubt very few Americans have a high degree of confidence in exactly what the resolution to the debt ceiling drama will be. My guess (notice I did not say “my expectation”) is that this issue will be kicked down the road, making the 2012 presidential election the mechanism for a resolution.
Along the way, however, I do expect the capital markets to price in a downgrade to the AAA-credit rating U.S. Treasuries enjoy. In an odd way, the capital markets “pricing in” a ratings downgrade might just be the motivation D.C policy makers need to meaningfully reduce the deficit and present a compromise agreement – while in front of primetime television cameras, of course.