The situation in Washington is fluid and something we continue to monitor closely. While it is difficult to speculate on the outcome surrounding the US debt ceiling debate, it appears that the lines of communication between Republicans and Democrats are beginning to open. US Government uncertainty is likely to remain elevated given the “kick-the-can” nature of the budget deal into early next year. This fiscal uncertainty further supports ongoing easy monetary policy, particularly given the dovish leanings of Janet Yellen, the presumptive incoming Fed chairman.
In contrast to the United States, Europe has been calm and economies are slowly improving. We remain hopeful that Japan will be successful in stimulating their economy, although policy missteps are quite possible; while China’s growth has acceleration potential in the short term but we continue to have longer-term concerns.
Equities pulled back off their highs and then rallied last week, while the US fixed income market has stayed quite calm, although there was some volatility in the short-term T-Bill market. Looking back at the August 2011 debt ceiling fight, both confidence and the economy bounced back sharply after the deal was struck. There’s also less fiscal drag coming out of the current deal vs. in 2011, when that deal was followed by sequestration and a major tax increase.
There seems to be even more reason this time around for confidence to return quickly. In 2011, the US debt rating was downgraded for the first time in history; Europe was in the throes of its debt crisis, Japan was struggling in its recession, and China’s growth was slowing. Today, the downgrade threat has diminished, Europe has stabilized and moved out of recession, Japan is aggressively attacking its economic malaise, and China seems to be reversing its slowdown, at least temporarily.
It will take some time to gauge the full impact of the government shutdown and data is likely to be somewhat skewed over the next couple of months. However, sitting on the sidelines isn’t a great option and stocks still appear to us to be the best place to invest money for the longer term.
Excerpts pulled from:
Schwab Market Perspective: In Other News…
by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc.; October 18, 2013
Politics Secondary to US Equity Fundamentals
By Grant Bowers, Franklin Templeton October 17, 2013