So the government shuts down, and Wall Street opens...up. What will get the stock market worried? At the very least, it seems like we need to drop below the August lows (1,628 on the S&P 500), about three percent below where we are now.
What's going to be affected in stock land? Defense contractors are the most obvious choice. "Any delay in government payments would quickly weaken defense contractors' liquidity," Moody's said last night. But the pain is not evenly distributed.
Importantly, we are done with the third quarter, so there will be no impact on earnings--at least not yet. But the longer this goes on, contract awards could be delayed, and funds will not be appropriated.
Another area possibly affected is home mortgages. The Federal Housing Administration (FHA) accounts for about one-third of mortgage origination. There was some indication that FHA applications would be halted during the shutdown over the weekend, but now the Department of Housing and Urban Development has indicated that a "limited" staff would be available to underwrite and approve new loans.
But how? They are furloughing most of their employees! This I want to see.
FHA is primarily used by first-time home buyers, so builders that cater to this group--Beazer, KB Home, Lennar and DR Horton would be the ones most affected if a slowdown occurred. If the shutdown only lasts for a few days, a temporary delay in approvals is unlikely to result in mass cancellations. If it goes on longer, it could be an issue.
One area not immediately affected, not yet: initial public offerings (IPOs). The SEC has to sign off on the price and terms of an IPO before it starts trading. They told me yesterday they would be open today, because they have "carryover funds," though it's not clear how long that will last.
Regardless, it's a big day in IPO land, with three brand-name IPOs set to price tonight: discount retailer Burlington Stores, real estate firm ReMax, and Empire Realty Trust (owner of the Empire State Building).
Ah well, at least we are in October. True, it is The Great Jinx Month (1929, 1987, 1997, 2008, among others), but it is the end of the "worst six months" period for the S&P 500. Respected market strategist Ed Yardeni last night was mildly bullish on stock prospects through the end of the year: "I see a selloff during October setting the stage for a Santa Claus rally..."
But, as the Stock Traders Almanac has noted, October is also the "Bear Killer" month, the month where bear markets were ended in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (whew!). On average since 1928, the S&P 500 has been up 49 times and down 36 times during the month, according to Yardeni.
1) global markets are mostly up, even Italy is up on some signs that Italian former prime minister Silvio Berlusconi may be losing control of his party (there is some hope that Prime Minister Letta may be able to survive a confidence vote tomorrow);
2) Lots of key questions have been swept under the rug due to the government shutdown. For one: the launch of the new insurance exchanges, which are starting up just as the government is shutting down.
Secondly, when will the Fed taper? No one has a clear idea, and the confusion is reflected in the analyst commentary. " We now have no real clues as to when the Fed might taper unless the economy clearly breaks out in either direction," Morningstar wrote. "That doesn't appear to be in the cards with this week's data."
Thirdly, there is no talk at all about Q3 earnings. It is another low bar quarter, with earnings expected to increase about four percent.
—By CNBC's Bob Pisani