Will there be a government shutdown in the next few weeks as the United States reaches its congressionally approved debt limit? If there is, what will be the impact on the stock and bond markets?
While no one can know for sure, we think you will enjoy our view in the attached.
We think you will also enjoy the news in terms of the markets, which have staged quite a stunning recovery of late. As we write this on Monday, the Dow is up over 140 points and appears to be moving forward on the heels of several very nice sessions.
Have a great week!
All the best,
Lee and Jeremy
This Week’s Quote:
“Many people wonder what a government shutdown would be like. I think a lot more people wonder what a government running properly would be like!” ~ Jay Leno
JL Davis Thoughts This Week:
While we may yet hear more from President Obama regarding the situation in Syria, it is a very safe bet that will be hearing a whole a lot more from both he and members of Congress in the coming weeks related to the US debt ceiling and the potential of a government shutdown.
Since last May, the $16.7 trillion US debt has barely moved at all. According to economist Brian Westbury, the US government through its Treasury Department has been using a number of accounting “gimmicks” in order to avoid hitting the congressionally approved debt limit. Actions like postponing payments to federal worker retirement plans, not reinvesting interest payments, and continuing resolutions regarding sequestration, have all been taken. There may well be a lot more we don’t know just yet, but the time of reckoning is near. The net result is that Congress will have to take up the matter of the debt ceiling very soon, perhaps in as little as the next 30 days. That’s when the political fur will fly in our view. The media will love it!
While stock and bond market volatility may increase when it comes, we don’t expect a lasting decline. After all, the political parties have no choice mathematically but to agree on increasing the national debt. Regardless of the fact that we may personally think the federal debt is a serious matter here at JL Davis, in the end…it’s just math! No matter how the media portrays it, defaulting on U.S. Treasury securities isn’t an option at all in our view.
Even if the two parties manage to disagree long enough to create a temporary government shutdown, there is still plenty of money coming into the Treasury from taxpayers to pay interest on the federal debt and plenty more besides. On the subject of a government shutdown, we think one like US citizens experienced in 1995-96 is a distinct possibility. But just like back then, the impact may be small since the Treasury Department would continue to collect revenue and pay essential bills - like Social Security checks—even in a shutdown. Our military stays at the ready, regardless. Importantly however, in the event of a shutdown, we don’t think even a member of Congress can stand the screaming that will be unleashed by the public. So it says here that it would be brief.
As to “non-essential” services like National Parks and such, those workers would likely get a furlough, just like ’95-’96. As to that, we are reminded of the well-traveled story about a tourist who arrived to visit Washington. After looking at all the amazing buildings and seeing the hustle and bustle throughout entire District of Columbia, he asked a local gentleman about to cross the street, “How many people work in this town?” The man replied, “About half.” We think the furloughs would be temporary too. We hasten to add that we know for sure the JL Davis clients who happen to be employed by the government do indeed work and we’re thankful for them!
The upshot of the coming debt ceiling debate from our perspective is much ado about a matter whose outcome is already assured. An increase in the debt limit. Then business as usual.**
Market Week: September 9, 2013
The Markets
Despite some flailing, the Dow managed its first positive week since the beginning of August, and the S&P, Nasdaq, and Russell 2000 all had strong gains. A disappointing jobs report and the intensifying Syrian dilemma fed the "bad news might be good news" syndrome that has been in place for weeks as investors hoped that both factors might help persuade the Fed not to begin tapering in September
Last Week's Headlines
• Though the U.S. economy added 169,000 jobs in August, the number was lower than expected, and the number of jobs added in July was revised downward. However, the unemployment rate fell slightly to 7.3% because 1.4 million people left the labor force.
• U.S. manufacturers saw strong expansion in August, according to the Institute for Supply Management's index, whose 55.7% reading was its highest since June 2011. Meanwhile, the ISM's non-manufacturing measure for July hit its highest level since the index began in 2008; the 2.6% increase to 58.6% was driven primarily by the retail and construction industries.
• The Federal Reserve's "beige book" report cited moderate expansion in most of the 12 Fed districts but also weaker lending activity resulting in part from higher mortgage rates. The anecdotal report, which covered early July through late August, did little to increase clarity about what the Fed's mindset might be at its September monetary policy meeting.
• Businesses increased their productivity from April through June. According to the Bureau of Labor Statistics, productivity rose at an annualized 2.3% rate in Q2, and industrial output was up 3.7%. Though there was a 1.4% increase in hours worked by the labor force as a whole, per-person labor costs were basically flat.
• Construction spending rose 0.6% in July. The Commerce Department said a more than 0.9% increase in spending on office/commercial buildings and factories as well as residential construction was partly offset by a nearly 0.4% drop in construction spending by state and local governments.
• Stronger domestic spending on oil prices and auto imports as well as weaker spending overseas on U.S. products helped reverse June's sharp decline in the U.S. trade deficit, putting it 13.3% higher at $39.1 billion--roughly the monthly average so far this year. July imports were up 1.6%, while exports fell 0.6% for the month.
• Both the European Central Bank and the Bank of England left their key interest rates unchanged at 0.5%. ECB President Mario Draghi said the bank now sees the eurozone economy contracting slightly less (-0.4%) than it had previously forecast, though its outlook for 2014 growth was cut slightly to 1%. Meanwhile, the BOE will continue to buy UK government bonds at its current pace.
Eye on the Week Ahead
Investor anticipation of the Fed's upcoming September monetary policy meeting will likely affect two auctions of long-term Treasury securities this week. As Congress returns to Washington, the debate over the Obama administration's proposal to intervene in Syria could have increasing impact on the mood of the markets. Retail sales will reflect back-to-school spending.
Key dates and data releases: 10-year Treasury note auction (9/11); 30-year Treasury bond auction, Treasury budget figures (9/12); wholesale inflation, retail sales (9/13).
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013
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