Now that we are entering peak week for earnings reporting, it is time to take a look at what that means for the stock market. We have some data so far, but not much, so I want to defer a detailed analysis to next week. For the moment, let’s look at financials.

I wrote back on June 11 and July 10 about the pressure the financial services industry, particularly banks, was likely to come under and the negative effect that was likely to have. Specific points I made were regulations, capital requirements, more operational scrutiny, slowing mortgage demand, and others.

In the past 24 hours, I’ve had several discussions that centered on the question “What do we do now?” During one, on Fox Business News yesterday afternoon, the anchor pointed out that, even as I was cautious on equities, the market had climbed a wall of worry all year—and looked likely to continue to do so. Does that make caution on equities wrong? Similarly, I was talking with a Wall Street Journal reporter this morning about where the market was going, and we got into the continuing government confrontation, earnings, and the real economy—all without coming to any real conclusions.

First things first: The fact that the market keeps going up doesn’t mean everything is all right. Under that standard, the housing market was perfectly fine in 2007, so I don’t think the fact that the market is rising means caution is inappropriate.

“Pro football is like nuclear warfare. There are no winners, only survivors.” — Frank Gifford

That pretty much sums up my take on the most recent confrontation in Washington, DC. No one won, and everyone lost. The Republicans took a huge poll and public relations hit, for no gain at all. The Democrats didn’t lose as much but, in many ways, came out looking just as petty and political. Congress has hit all-time lows in public support, something I would have said was almost impossible, and the White House has been roundly and justly lambasted for its lack of leadership.

Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion about why the Fed doesn’t forgive the debt. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.

I’ve spent quite a bit of time over the past couple of days talking with advisors about the potential consequences if the government doesn’t make a deal in time. Yesterday, I did an interview with Chuck Jaffe of MoneyLife Radio that focused on exactly that. As we move closer to the supposed drop-dead date—that would be tomorrow—I thought it would be useful to look at how I’m thinking about investing.

First of all, let’s hit a couple of points I’ve made before. In the longer term, the events of the next week or so will not be significant. The U.S. economy is diverse, solid, and set to outperform for at least the next 20 years and probably more. Markets will reflect that growth, and, longer term, you absolutely want to be invested here. At the same time, current valuations are at the very least not cheap, and it’s been some time since we’ve had a correction in the U.S. stock market. Quite apart from the current situation, we are overdue. Again, this isn’t to minimize what might happen, simply to put it in context.

First of all, thank you to everyone who wrote nice things about my appearance on CNBC yesterday—much appreciated. It’s fun to do that kind of appearance because you never know exactly what will be discussed, and you have to prepare. Keeps me on my toes!

This will be a short post because I’m in New York attending a conference on ETFs put on by iShares. ETFs, for those who haven’t run into them, are exchange-traded funds—that is, a portfolio of assets (stocks, bonds, what have you) that is traded like a single share of stock. They are similar to a mutual fund that tracks a specific stock or bond index, such as the Barclays Capital 1-3 Year Treasury Index. ETFs trade on one of the major stock markets and can be bought and sold throughout the trading day, like a stock, at the current market price. And, like stock investing, ETF investing involves principal risk—the chance that you won’t get all the money back that you originally invested—market risk, underlying securities risk, and secondary market price. ETFs have become a major part of the investing landscape over the past several years, changing the way many people and institutions invest.

Over the weekend, I traded e-mails with one of our advisors, who pointed out that I hadn’t yet done a complete explanation of the situation in Washington, DC. Sure, I’d touched on various aspects of it, but I hadn’t really looked at the thing as a whole. So here’s my take. Thanks, Alex, for the great idea!

The Big Picture

One of the great things about working at Commonwealth is the depth of knowledge of our team. Today, we have another post from Peter Essele, one of our portfolio managers and analysts.

The consequences of the debt ceiling standoff and government shutdown continue to reverberate. Markets are increasingly showing signs of nervousness, with excess volatility tracking news reports as they come out of DC.

I’ve been reviewing my posts and articles from the last time we went down the debt ceiling crisis road, and marveling a bit. Trillion-dollar coin indeed! That post proved to be prescient in a lot of ways, although 10 months early. The options I outlined there remain the most probable this time around, but no one has been trotting them out so far. Instead, the discussion has revolved around how to make payments once we run out of money.

I don’t like the spirit of despair that this kind of planning reflects, and I think I have a better idea about how to solve the problem. It requires no issuance of coins, no scrip rather than cash—although the difference is small—and no constitutional confrontation.