"The roof, the roof, the roof is on fire. We don't need any water, let it burn." -Rock Master Scott & the Dynamic Three
The United States has a debt limit (insert your joke here). The purpose of the debt limit is to manage the country's allowable debt relative to its earnings or Gross Domestic Product (GDP). According to the White House Office of Management and Budget, the debt limit has been raised 106 times since 1940, including:
As the United States was rapidly approaching the debt limit during the summer of 2011, both the democrats and the republicans attempted to use the debt ceiling to push through their respective agendas. This uncertainty helped the S&P 500 Index fell approximately 5.3% during August of 2011 until an agreement was announced at the last possible moment. The “solution” was a modest increase of the debt ceiling without resolving the future of tax rates or government spending and creating the "fiscal cliff". This decision applied a band-aid and delayed making tough decisions until December 31, 2012.
"My, my, my, I’m once bitten, twice shy babe.”
-Great White
The "fiscal cliff" was designed to be equally unpalatable to both political parties by putting in place automatic spending cuts to areas such as national defense and social programs and regressive tax increases that would negatively impact almost all US taxpayers. Many predicted this would create a massive drag on our economy and throw the US into a recession. If an agreement to raise the debt ceiling and find some common ground on taxes and spending could not be reached by December 31, 2012, we would go over this "fiscal cliff".
Again, both parties attempted to take political advantage over this debate. The result was a small increase to the debt ceiling, an agreement to increase taxes on the top brackets to avoid increases for all tax payers, but a delay on the automatic spending cuts and then created "sequestration". In other words, another band-aid was applied and congress punted again until March 1, 2013. During December 2012, the S&P 500 Index was up almost 1.2%.
"You can fool some people sometimes, but you can't fool all the people all the time."
-Bob Marley
"Sequestration" is the term for the automatic spending cuts that had been agreed on by both parties and the President if a resolution to taxes, spending and the debt ceiling could not be reached. Once again, both parties tried to leverage this event to push their respective agendas. On March 1, 2013, with no agreement in place, the automatic spending cuts were enacted.
Amazingly, the S&P 500 Index continued to rally and was up over 3.3% during the month of March. Essentially, the markets told our elected representatives that it sees the pattern of patch and punt and that we are better off focusing on the fundamentals of the market rather than be held hostage by their inability to work together in the best interest of the country as a whole.
Now, according to Treasury Secretary Jack Lew, the US will hit our debt limit on or around October 17, 2013 and the political lines continue to be drawn. Going into October, the stock market has been unsettled while trying to get a bearing on the potential outcome on this latest manmade "crisis".
"Ticking away the moments that make up a dull day,
You fritter and waste the hours in an offhand way.”
-Pink Floyd
It is important to consider how changes in tax, fiscal or economic policy may affect your portfolio and if there is a need to consider changes to attempt to protect your investments or reposition for potentially stronger appreciation opportunities. But, it is equally important to separate information from noise. It is critical to make important decisions based more on thought than emotion.
Unfortunately, there has been a tremendous amount of noise coming out of Washington DC. Crisis, artificial or not, breeds opportunity. With Congress's growing track record of inaction and deferral, I remain focused on being opportunistic. This volatility, although unpleasant on the short-term, may be providing great entry points opportunity to reallocate portfolios.
Football season is in full swing, which is appropriate for a Congress that is three and out and is setting up to punt again. Time to set up to return the kick!
Past performance does not guarantee future results. The performance noted does not include transaction costs which would reduce an investor's return.
