There is a lot of buzz flying around about this latest self-inflicted wound delivered by the U.S. Congress upon the citizens of their country. Left or right, none of us wanted to be here yet again, but after five years of patches, delays, issue avoidance and cans kicked down the road, no one should really be surprised.
However, our counsel is to be patient. The markets are so far fairly unimpressed with this latest crisis, given that we’ve been here 17 times since the late 1970s and always lived to fight another day. Granted, the ideological divide is as large as the Grand Canyon (which, by the way, is closed), and with the possible exception of the 1996 shutdown led by Newt Gingrich we don’t recall a time when there has been such a willingness by both parties to ride the barrel over the falls.
Much of the economic impact being bandied about in the media is pure speculation, since it entirely depends on how long the shutdown lasts. Historically, they’ve run one to three days, although we did have that 21-day shutdown in 1996. Under the cloak of a lot of assumptions about government’s impact on the broader economy, Morgan Stanley has estimated an impact of roughly $5.4 billion, or about 0.15 percent, off GDP for every week the government is closed shutdown.
Most Americans are not experiencing much disruption unless they are actively trying to work with a Federal Agency in some way. The longer it lasts, though, the more likely businesses and consumers alike will come up against something that can’t get done, processed, approved, paid, invoiced, etc.
For financial markets, the debt ceiling is – by far – the bigger issue. Failure to raise the statutory debt limit in a few weeks would be the greatest challenge to the markets since the height of the financial crisis in 2008. It would result in a massive curtailment of government spending, since at that point the U.S. Treasury would only be authorized to spend what it is bringing in at any given moment. This would lead the Feds to prioritize debt payments so as to avoid a default, but we’re not sure it would matter – the markets would rightly construe such a situation as a default in all but name. And THAT, ladies and gentlemen, would make the government shutdown look like a carousel ride.
The most probable course from here is a few more days of chest pounding and figure pointing, and then a budget deal which, one way or another, increases the debt limit. We have a very hard time believing a sitting U.S. Congress would consciously allow a default to happen on their watch, so our bet – as in every one of these debates we’ve had over the past several years – is that the far larger risk represented by the debt ceiling will be successfully navigated.
In the meantime, we don’t think the stock market will pay a huge amount of attention until clarity on the debt ceiling arrives. Stocks may slip a little if no information is forthcoming, as the media will continue to fan this mess as hard as they can. But we wouldn’t bite, and remember that in the background, global economic indicators continue to suggest a resynchronization of growth is under way. Bonds are likely to go up, pushing yields down, the longer the impasse exists, for no other reason than safe harbor. However, this is a temporary reprieve – although the Fed will not go near tapering until the budget mess in Washington is alleviated, there is still every reason to believe the strategic trend for bond prices is down.
The bottom line? The shutdown is not as big a deal as you’re being told, and you should not be trading based upon it. Historically, the markets come through shutdowns fine, so be patient. The debt ceiling is the landmine we must avoid, but the odds favor a bargain that rolls the budget debate up into the debt ceiling argument and clears the decks in a single stroke. That’s the most probable outcome, and that’s the one that leads to continued recovery.
Source: Scott Chan, Leebs Market Forecast
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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