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Lions, Tigers, and Bears…Oh My!

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(Government Shutdown, Debt Ceilings, and the End of Quantitative Easing…Oh My!)

Perhaps the most interesting thing to notice about America's 20+% stock market returns so far this year--extraordinary by any measure--is that they were accomplished at a time when investors seemed to be constantly skittish.  Just a few weeks ago, everybody seemed to be worried that the Federal Reserve would end its QE3 program and let interest rates find their natural balance in the economy.  One might wonder why this would be such a scary event, since it is the Fed's economists way of telling us that the U.S. economy is finally getting back on its feet.

All eyes are still on Washington, but now they've moved from the Fed to the Capitol Building.  The question everybody has been asking in the final days of the quarter is: what would be the investment and economic impact of a government shutdown?  This question might be one to consider going forward, since the two parties seem to have a lot of fundamental disagreements over spending priorities, and budget battles could become quarterly events.

An article in the Los Angeles Times says that most economists and analysts seem to anticipate a partial two-week government shutdown.  The lost pay for hundreds of thousands of furloughed federal workers would cut 0.3 to 0.4 percentage points off of fourth quarter growth--the difference between weak 2% growth annual growth that the economy is currently experiencing and an anemic 1.6% growth rate that would be flirting with recession.  An estimate by Goldman Sachs puts the potential lost GDP at 0.9%.

A longer shutdown could cause disruptions in private-sector production and investments, and would almost certainly lead to stock market declines.  The L.A. Times article notes that stocks lost about 4% of their value during the December 1995-January 1996 shutdown.  Job growth stalled, and the GDP gained just 2.7% in that first quarter. 

Interestingly, Congress has quietly moved away from the issue that has triggered the last few budget stalemates, focusing this time on whether or not to fully fund the health care legislation.  In the past, the issue was budget deficits, but it turns out that the budget deficit has come down dramatically over the past 12 months.  The U.S. government posted a $117 billion surplus in June, and the Congressional Budget Office expects to run a surplus again in September--the result of revenue gains as a result of tax hikes plus the growing economy, coupled with a 10% reduction in spending. 

What does all this mean for your investments in the final quarter?  Who knows?  Nobody could have predicted with all the hand-wringing over last year’s election, the fiscal cliff and new tax legislation, that we would be standing nine months into 2013 with significant investment gains in the U.S. markets and a resurgence in global investments led by, of all places, Europe. 

This much we can predict: the recent uncertainties--the paralysis in Congress, worries about the direction of interest rates and whether the Fed is going to stop intervening in the markets--will give way to new worries, new uncertainties, which will make all of us feel in our guts like the world is going to hell in a handbasket. 

But the headlines obscure the fact that investment returns are created the hard way, by millions of people getting up in the morning and going to work and spending their day finding ways to improve American businesses, generate profits, create new products and new markets, day after day after day. 

Whatever ups and downs you will experience--and you WILL experience them, perhaps in the next quarter or the next year--that underlying driver of business enterprises and stock value is constantly working on your behalf.  That will be true no matter what the headlines say, no matter how spooked you feel about whatever scary thing is going on in the world.  Nobody enjoys the investment ride the way children enjoy the thrills of a roller coaster, but both seem to ultimately deliver their riders to a semblance of safety in the end.

Stay disciplined. Stay focused. Focus on the things you can control and matter; ignore the rest.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

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