|OK, OK, this photo is just to get your attention. This guest column offers some |
basic information on our economy worth reviewing.
Pay Attention to What's Missing
GUEST BLOG--By Kate Warne, Investment Strategist, Edward Jones & Co.--It's sometimes difficult to notice what's missing -- but as Sherlock Holmes observed when the dog didn't bark, what's missing can be as important as what's present. So what are we missing from today's investing landscape? Keep the following missing pieces top-of-mind:
--Progress to reopen the government
--A negative reaction from financial markets to these concerns
--September jobs numbers
--An agreement to raise the debt ceiling
Growth Slower, Then Stronger?
By now, we are all aware of the first two missing pieces mentioned above: the lack of progress to reopen the government and the financial markets taking the partial shutdown in stride. And the lack of any reaction is similar to many of the previous 17 government shutdowns, when stocks declined 0.9% on average. After those past shutdowns ended, stocks gained 13.3% over the following year. We don't know what will happen this time, and past performance is not a guarantee of future results -- but we believe stocks appear attractive if appropriate for your situation.
If the shutdown continues for two weeks, it will reduce fourth-quarter economic growth by about 0.3% from the current projection of 2.1%, according to forecasting firm Macroeconomic Advisers. But we believe the pace of economic growth would be boosted in the first quarter of 2014. While the impact certainly isn't small for those directly affected, especially government and related workers who are furloughed, it isn't likely to push the overall economy into recession.
Without the government's data on the economy, especially the job market, the Federal Reserve is likely to leave its current bond-buying program in place for longer. And if the partial government shutdown is lengthy, it could delay any policy change until next year, choosing to continue to support the economy with low interest rates. So even if the economy appears to slow, we believe it's likely to be temporary. As a result, we think investors should be prepared, stay invested and look for possible opportunities.
Could the U.S. Default on Its Debt?
Don't forget about the last missing item in the bulleted list above: an agreement to raise the debt ceiling. Although Congress has not been able to agree to reopen the government, we continue to believe it will reach a last-minute agreement to raise the debt ceiling near the Oct. 17 deadline set by the Treasury. The U.S. has the resources to pay its debts, but it won't have the cash available to pay the bills unless the debt ceiling is increased. And non-payment would be unprecedented.
The debt ceiling has been increased 79 times in the past, starting in 1950. There was essentially no market reaction to 78 of the 79 increases.** But in August 2011, when Congress waited until the last minute to raise the debt ceiling, stocks dropped more than 15%. In addition, the credit rating agency S&P downgraded its rating on U.S. debt from AAA. Stocks were up 12% six months later, and up 16% a year later.*** While we hope Congress will act sooner to avoid any replay of the negative market reaction, we think investors need to be prepared.
What Could You Be Missing?
Stocks have pulled back slightly from their record highs, warily eyeing the budget dilemma and the approaching debt ceiling deadline. Don't let the Washington worries unravel your long-term financial strategy. Prepare by reviewing your investments, and make changes if needed.
Do you have an appropriate amount in stocks?
Do you have some international equity investments?
Do you have an appropriately diversified bond portfolio with a variety of different maturities?
Do you have enough in cash?
An appropriately structured portfolio can help you stay calm, invested and able to act on appropriate opportunities despite possible brinkmanship in Washington.
Guest blog courtesy of Kevin Poe
La Mesa office of Edward Jones & Co.
8140 La Mesa Blvd
La Mesa, CA 91942