A bitterly divided Congress, a government shutdown, an impending debt ceiling debate – this must be a sign that our political landscape is as bad as it has ever been. But, from what I can tell Americans are instead coming together and becoming increasingly united…in their disgust with our government! The Onion, self-acclaimed as “America’s Finest News Source” (they are a satirical news outlet) had a spectacular headline recently titled “Psychiatrists Deeply Concerned for 5% of Americans Who Approve of Congress”. At least there is still a laugh to be had out of all of the political dysfunction out there!
Regardless of your political opinion and all jokes aside there are implications of the political debates in regards to your investments. Looking back to August 2011 when Congress narrowly avoided defaulting on our debt we can see the results of the poor work efforts by our elected officials. A last minute debt ceiling increase was passed back then, but Standard & Poors still downgraded U.S. Treasury debt from their highest credit quality of AAA based on the political dysfunction. Markets were shaken with uncertainty, and this resulted in a quick decline in the stock market – but oddly enough a rush of investors bought Treasury bonds for their safety. See the irony there?
Several days ago we saw a strong rally when headlines crossed that there were talks that both sides may agree to potentially a six week increase in the debt ceiling. I take this as showing how low the market expectations are for political outcomes – a strong rally on talks of maybe meeting about a maybe making a decision…not now, but within 6 weeks. Had you have tried to time the market reading the headlines earlier last week, you would have missed this incredible rally that seemingly came as a result of very little.
What we do know is that in the end, as messy as it may be, a solution will come, the government will reopen, and the debt ceiling will be increased. Though the near-term uncertainty can hurt markets, just look at the longer-term results from August 2011 when the S&P 500 traded below 1,200 compared to over 1,700 now. Over time a recovering economy and growing company profits drive the stock market. The politics is just an unfortunate and embarrassing side-show along the way.
Travis Boyer, CFA