Investors appeared to
be as optimistic as a newly-engaged couple last week. Strong housing data, a
positive labor report, temporary easing of debt ceiling pressures, and some stronger-than-expected
earnings results helped the Standard & Poor’s 500 and the Dow Jones
Industrials indices close at five-year highs.
Commerce Department
data showed housing starts climbed by 12.1 percent in December, on an
annualized basis, exceeding economists’ expectations. Home construction is
expected to continue to rebound, as long as mortgage rates remain low, and experts
anticipate sales of new and existing homes will show improvement this week. This
continued improvement in the housing market may have contributed to a more positive
investor outlook.
The possibility of a
debt ceiling compromise also encouraged markets higher. Unlike down-to-the-wire
fiscal cliff negotiations, which caused investors to hold back at the end of 2012,
discussions of temporary debt ceiling extensions by House Republicans soothed investors’
concerns.
Several companies,
including several high-profile Wall Street banks, reported strong results last
week, and several companies reported earnings that beat lowered expectations.
This helped drive bank, transportation, and housing indices to historic or
multi-year highs. Since the Transportation sector includes many highly cyclical and economically sensitive stocks,
which tend to underperform when investors anticipate recession, this was seen
as positive news for the economy.
According to Barron’s, a secular bull market
begins when both transportation companies and the Dow Jones Industrial Average hit
new highs. The Dow Jones Transportation Average reached a new high last week,
but the Industrials index remains 4 percent below its highest close which was reached
back in October 2007. Are we headed for a bull market? Only time will tell.
What’s the
difference between America’s deficit and
its debt, and how do they relate to the debt ceiling? The terms deficit, debt,
and debt ceiling are likely to be bandied about by politicians and the media
frequently in coming months. It’s important for all Americans to understand these
terms.
The deficit
America’s
deficit is its annual budget shortfall. Any year the government’s spending
exceeds its revenue (the amount of money taken in through taxes and other
means), it has a deficit. When the government spends less than it takes in, it
is called a surplus. Deficits are controversial and have been for many years.
Keynesian economics states deficits can be used to stimulate economies and help
countries rise out of recession. Other experts argue governments should not
incur deficits because the money paid in interest could be better spent
elsewhere.
The debt
The
national debt is the full amount the American government owes – all of its
deficits and surpluses added together. If the government runs at a deficit of
$10 million for five years, then its debt will be $50 million. Every year that
a country runs at a deficit, its debt increases.
The debt ceiling
When
a government runs at a deficit, it must borrow money to keep operating. The
U.S. government generally borrows by selling securities such as Treasury bills,
notes, bonds, and savings bonds. The amount it can borrow this way is limited
by the debt ceiling, which was established under the Second Liberty Bond Act of
1917.
The United States hit its
current debt ceiling, which is about $16.4 trillion, on December 31, 2012. Before it can issue additional debt, Congress
will need to raise the debt ceiling. This may make the debt ceiling a popular
topic in political conversation during the next few months!
Weekly
Focus – Think About It
Compromise: n. Such an adjustment of conflicting
interests as gives each adversary the satisfaction of thinking he has got what
he ought not to have, and is deprived of nothing except what was justly his
due.
--Ambrose Bierce, American journalist
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