“Wise men speak because they have something to say; Fools because they have to say something” – Plato
In my opinion, it now appears that we have no “Wise men” among our elected officials in Washington but a collection of “Fools” who are determined to undermine the good that has been occurring both domestically and abroad.
Coming into September I was worried about 4 things:
1 – The situation in Syria
2 – Who would be nominated to replace Bernanke as FED Chairman
3 – The FED meeting on 9/19/13, where everyone anticipated tapering of the current bond buying program by the FED
4 – The end of the US Government fiscal year on 9/30/13 with no budget or spending plan in place for FY 2014
Well, the first 3 worries turned out better than I expected as (1) we didn’t attack Syria and diplomacy seems to working; (2) Larry Summers, the front-runner for the next FED Chairman, withdrew his name which the financial markets applauded; (3) the FED decided NOT to taper citing continued but sluggish growth in the US economy, which surprised the market positively. Even one thing I didn’t include came out positive – the re-election of Angela Merkel in Germany, which bodes well for continued stimulative efforts to revive the European economy.
The result of these events was a boost to the equity and fixed income markets. Interest rates (basis US 10yr Treasury) declined from 2.90% on 9/13/13 to 2.62% on 9/30/13 and the S&P 500 gained 3.0% during September 2013 after having declined 4.3% in August 2013. (note: fixed income investments have an inverse relationship with interest rates = when rates go down, values go up and vice versa)
A synchronized global expansion appears to be underway. Economic growth is not good anywhere, but it is positive just about everywhere. In the US, housing & autos are doing well as is manufacturing, which is benefiting from the reduction of energy costs thanks to Shale gas (Oct 3 (WSJ) — The US is overtaking Russia as the world’s largest producer of oil and natural gas). Last week there were stronger readings for UK home prices, the Eurozone economic climate index, Japan small business sentiment and China corporate profits. (source: International Strategy & Investment). This is vastly different from this time last year when the US was in a growth slowdown (with the S&P 500 some 15% below where it is today), there were concerns about a hard landing for the economy in China and the Eurozone was at risk of coming apart. For now these positives will have to take a back seat to the nonsense going on in Washington.
While I am sure you are tired of hearing about the current “Government shutdown” here are some interesting facts:
1. There have been 17 “shutdowns” since 1970.
2. The shortest duration was 1 day (in 1982, 1984, 1986, and 1987 – gotta love the 80’s).
3. The longest shutdown was 21 days from 12/15/95 thru 1/06/96 (must have been a great holiday season for the folks affected).
4. The median duration was 3 days – so we are about to go “above average” with this current charade.
5. For investors – perhaps the most important statistic is that in 11 of those 17 instances the equity markets (basis S&P 500) was higher 1 month later than during the shutdown. (see chart below)
Compromise has always occurred, generally in favor of the incumbent president as that office, along with the Treasury department, has significant latitude into how the government pays its bills. Equally, no president wants to preside over a prolonged shutdown or a default, which is the next looming deadline for Washington – somewhere around October 17, 2013. My guess is that, in the end, some compromise will be reached this time as well.
I am reluctant to react to the current political shenanigans, mostly because of the positive economic outlook for the global economy, the amount of cash still sitting on the sidelines for individual investors and on corporate balance sheets, and the fact that the US budget deficit has been cut in half (down to 4% of GDP from a high of 10% in 2009 per Ned Davis Research) as a result of an improving economy and reduced government spending. I feel that any over-reaction by the markets will provide a good entry point for new investment dollars. However, if I am wrong and the US does default leading to significant financial instability I am prepared to respond accordingly.
I hope you find this report informative. Please feel free to call me with any questions or concerns. You can also pass this report on to anyone who you feel who appreciate receiving it.
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