Stay the course, despite political headwinds
T he stock market has been down all week. Investors have been so busy biting their nails over the debt ceiling and the budget debates that they have had no time to buy this dip. The question is should they?
The S&P 500 has fallen about 33 points since last week, or roughly 1.8 percent. I blame our elected clowns. As the clock runs out and a Tuesday shutdown of the government grows ever closer, weak-kneed investors are bailing. Yet a government shutdown is small potatoes compared to the risk of not raising the debt ceiling.
Government shut downs have occurred 17 times since the 1970s. The longest was a three-week stretch during the Clinton years and none of them had done any lasting harm to the economy, the government or to the stock market. The debt ceiling debate may be a horse of a different color.
There could be some real harm done to all of the above if Congress were to choose not to raise the debt ceiling in the middle of October. Although the U.S. Treasury might be able to still pay its bills for another week or so, default would certainly be a direct result of this congressional insanity.
It is ludicrous that this tea party-inspired game of chicken has actually gotten this far. A default would cost this country at least as much as the entire 2013 federal deficit in higher interest rates and lost economic activity. How, therefore, does the Republican Party achieve its goal of reducing our debt and balancing our nation’s budget by doubling the size of both overnight?
It is informative to look back just two years ago to the summer of 2011 to see how the GOP’s first stab at blackmail proved out. At that time the debt ceiling debacle was narrowly averted by both parties agreeing to the Budget Control Act. But a few days later the Standard and Poor’s Credit Rating Agency downgraded our national debt due to our dysfunctional political process and its legislators. The Dow dropped 635 points -- 5.6 percent -- in one day while during the summer fiasco, the S&P 500 Index lost 16.5 percent.
The Budget Control Act ushered in the sequestration mechanism of automatic spending cuts when neither party could agree on tax and spending measures to reduce the deficit. Those spending cuts were enacted at the beginning of this year. As a result, employment gains have slowed and the growth rate of the economy reduced in 2013. Go Republicans!
However, notice something interesting about the market’s reaction today to these same set of circumstances. The stock market has declined less than 2 percent versus the 16.5 percent selloff in 2011. Interest rates, rather than spiking on the threat of a default, have actually declined from close to 3 percent on the 10-year Treasury note to 2.61 percent today.
The message here is to focus on price, not hyperbole. The media would have you believe that the world is coming to an end once again. The tea party, desperately trying to gain support before their primary elections, are playing us all. Investors aren’t buying it. Too often in the past, we have sold out in fear of what these politicians would do only to discover that they are all paper tigers. Don’t fall for it this time. Buy the dip.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Reach him at 1-888-232-6072 (toll free) or Bill@afewdollarsmore.com.
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