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| 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
(619) 461-0100
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