No Default, No Doubt: S&P 500 Hits Record High as Standoff Ends

When I was growing up, a new movie starring Sylvester Stallone or Arnold Schwarzenegger alone would have been a box office hit. The two of them together? That would have been mana from heaven for Hollywood. These days, not so much. The roll out of their new film, Escape Plan, is drawing little more than shrugs.

AFP/Getty Images How happy were markets that Washington made a deal? Almost as happy as the Afghanistan soccer team after beating Pakistan in August.

Still, Escape Plan seems like an appropriate film for this week’s stock market. Stallone plays a security expert who is paid to break out of jail–but gets stuck in a CIA prison…forever. The government shutdown and debt-ceiling fiasco had that feel. Like being stuck in jail with a hint of release or having to watch Arnold and Sly ham it up in 2013. Either way. Take your pick.

So when the deal was struck, the government reopened and the debt ceiling raised, stocks celebrated. The S&P 500 gained 2.4% to 1,744.50, a new record high and the 28th this year. The Russell 2000 rose 2.8% to 1,114.77, also a record high–its 54th this year. The Dow Jones Industrial Average rose just 1.1% to 15,399.65.

The short-term nature of the deal–the government is funded only through Jan. 15 and the debt ceiling extended until Feb. 7–means there’s a good chance we’ll be doing this all over again in three months. Won’t that be fun? RBC Capital Market’s Tom Porcelli and team explain why the short-term deal could push off tapering far into the future:

The timing on the debt ceiling extension in particular is interesting from a monetary policy perspective. Fed officials have been rather clear that the reason they decided against tapering in September was based on fear political negotiations would generate an adverse outcome. Our original stance was tapering had been pushed off to March, but this needs to be re-thought in light of the Feb 7 debt ceiling extension. In reality, thanks to the Treasury Department's ability to employ extraordinary accounting measures, we will not hit the ceiling until at least mid March and perhaps even as late as June. In the context of a Fed that decided to unload a massive surprise on the market by not tapering in September, if political turmoil awaits us early in the new year, perhaps we need to begin thinking of tapering as a Q2 event.

Earnings were a mixed bag this week. Thomson Reuters Greg Harrison explains:

20% of the S&P 500 companies have reported Q3 2013 EPS. Of the 98 companies in the S&P 500 that have reported earnings to date for Q3 2013, 62.2% have reported earnings above analyst expectations, 13.3% reported earnings in line with analyst expectations and 24.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 63% of companies beat estimates, 17% match and 21% miss estimates. Over the past four quarters, 66% of companies beat estimates, 10% matched and 24% missed estimates.

Citigroup’s Tobias Levkovich argues that there is “more upside in the next year beyond EPS
growth.” He writes:

The approach taken to normalize the multiple by using cyclically adjusted P/E ratios and the futures contract on the bond yield provides an intriguing set of statistics that supports further equity index gains beyond the expected 6%-like profit growth. Indeed, the probability of a respectable upward market move is better than 90% while the P/E bull's-eye work also shows that stocks are poised for incremental appreciation.

Stocks have escaped Washington. Can they achieve escape velocity?

Some individual stocks certainly did this week. Chipotle Mexican Grill (CMG) rose 19% to $509.74–a new all-time closing high–despite missing earnings forecasts. Strong same-store sales will do that. Baker Hughes (BHI), meanwhile, gained 11% to $55.55 after the oil-services company reported far stronger earnings than analysts had expected thanks to its business in the Middle East and Asia Pacific. Advance Auto Parts (AAP) gained 20% after purchasing a competitor and making itself the largest auto-parts supplier by revenue.

Others, however, gave back six months of gains in one week. That was the case for Select Comfort (SCSS), which plunged 29% to $18.60 this week after missing earnings forecasts and cutting guidance for the second time in 2013. Stanley Black & Decker (SWK), meanwhile, fell 15% to $77.16 after it beat earnings but lowered its guidance. It blamed weak margins in its security business, emerging markets and…wait for it…the government shutdown.

There is no escape.