Based purely on the fact that a U.S. default would be so catastrophic that it would immediately disrupt the global economy, most market watchers describe the risk of default as very unlikely.
“This is a manufactured political crisis, and because of that, it is incumbent on investors to look past this and to the true fundamentals that drive markets,” said Douglas Cote, chief investment strategist at ING U.S. Investment Management.
For context on the magnitude of a U.S. default, consider that the U.S. dollar represents 75% of the more than $5 trillion worth of daily global currency trading.
“If all of a sudden, we're not paying our debt, then global currency transactions could effectively freeze, and you don't even want a pause because that leads to deflation and a depression,” Mr. Cote said. “Default is not going to happen.”
Treasury Secretary Jacob Lew has stated that the federal government has only enough credit available to meet the Oct. 17 debt payment of about $30 billion. Other analysts have suggested that the October payment date is less significant than a larger November payment deadline.
2. How does the government shutdown affect the country's ability to meet its debt payments?
The partial government shutdown that began Oct. 1 isn't directly related to the debate over raising the government's borrowing limit beyond the current level of $16.7 trillion.
The shutdown, which is the result of Congress not agreeing to pass a budget or a continuing resolution to fund government, prohibits discretionary spending but not mandatory spending or debt service, according to Moody's Investors Service.
Although the shutdown initially rattled the financial markets, attention quickly shifted to the looming debt limit debate, which has been linked to an Oct. 17 debt payment deadline.
Since the start of the shutdown, the S&P 500 has seen increased volatility and reduced trading volume but was essentially unchanged over the first eight trading days of the shutdown.
Even without factoring in the more significant issue of default risk, the shutdown generally was considered to be negligible at worst and an investment opportunity at best.
“I tell all my clients that the average shutdown lasts about five days and that historically, the market usually responds with an 18% increase over the next six months after the shutdown,” said Theodore Feight, owner of the advisory firm Creative Financial Design.
3. With so much up in the air, is this a good time to get out of the markets?
Thursday's equity market rally is a perfect example of why investors should never try to invest based on Washington politics.
Although market volatility has increased since the Oct. 1 government shutdown began, on a purely fundamental basis, the equity markets remain attractive.
If investors are holding a lot of cash, this might be a good time to start dollar cost averaging back into the markets, according to Adam Patti, chief executive of IndexIQ.
“We already gave back all of September's gains, so this is a time to get back into an asset allocation strategy,” he said. “The politicians are just playing games right now.”
With an outlook for a solid third-quarter earnings season, which started this week, there is reason to think that the fourth quarter of the year will be strong, as well, according to Greg Sarian, managing director at The Sarian Group.
“There are still a lot of retail investors that have not bought into this recovery, and this could be a good opportunity to purchase stocks at lower prices,” he said.
Source: Jeff Benjamin, Investment News
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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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