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Question of the Week

Scott Maxwell - Tuesday, October 01, 2013

Should I worry about the government shutting down (again) or defaulting on its debt?

You would think we’d get over this by now with so many Americans growing so very tired of these petty and unnecessary congressional battles. Sadly it seems to me that the Republicans stuck their foot squarely in the middle of it this time, first creating a furor about a bill that helps the uninsurable obtain coverage and then crying out that their constituents don’t want that to succeed. My sense is that they have sown the wind and will reap the tempest but only time will tell.

Unfortunately, perceptions of these events can also have secondary effects.  They can trickle down to lessened certainty about forward-looking prospects about the economy (legitimate long-term fear or not), which can potentially erode overall sentiment about business and job prospects, which can suppress private spending, which can hold back corporate revenues, which can pressure profits, which can hold back economic growth.  You can see how a negative feedback loop can easily begin if sentiment surrounding such issues becomes too negative, which is why economists pay attention to things like this.

There are a lot of moving parts to these two issues that are simply not ‘modelable’ in a traditional investment framework. So far today, after the official partial shutdown of government at midnight, markets are rebounding.  Related to this, one of our favorite quotes comes from Oppenheimer Funds chief market strategist Jerry Webman, who reiterates “Hating one’s government is not an investment strategy.” The markets have tended to agree it seems. But, due to uncertain outcomes in the shorter-term we can’t remind ourselves often enough about the benefits of a diversified portfolio—where both stocks and bonds may act quite differently from each other during such periods (as in 2011), and differently than one might first expect.

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