If you lived in France, you’d probably know a bit about wine. If you spent a lot of time in New Orleans, you’d pick up a thing or two about jazz. We live in Orlando so we know all about “Mickey Mouse” when we see it. And that’s exactly what we saw from our elected officials on both sides of the aisle in Washington DC this past month – Mickey Mouse quality work. When all the shenanigans finally subsided, real damage was done and real issues remain.
In our routine research reading, we thought the folks at the investment arm of German giant Allianz, distilled it well. Here was their take, with which we largely agree:
The fiscal crisis in Washington has ended, albeit temporarily, but there are clear implications for markets, the economic recovery and monetary policy. Here are the key takeaways—some good, some bad.
When it comes to dealing with dysfunction in Washington, we’re all suffering from fatigue. Fortunately, the crisis finally ended last week, and investors breathed a sigh of relief. While the stock market climbed to new highs and Treasuries rallied in the wake of a short-term resolution, the economy reportedly took a $24 billion hit, according to Standard & Poor’s.
So how do we make sense of this unfortunate chapter in US history? There are some clear implications, both good and bad.
Let’s start with the bad:
The economy is in worse shape than when the shutdown started. Standard & Poor’s now projects that the US economy will grow 2.4% in the fourth quarter, which is a downward revision from the roughly 3% growth rate predicted prior to the shutdown.
The deal is a very short-term fix. The temporary continuing resolution means the government has reopened and will be funded at current levels until Jan. 15, 2014. The debt ceiling has been raised through Feb. 7, 2014, and the Treasury has permission to use “extraordinary measures” to borrow money after that date, if necessary. The deadlines are not far apart, suggesting one issue could bleed into the other again.
Americans have lost even more confidence in their government and the economic recovery. Indeed, 47% of American consumers polled by Bloomberg believe the economy is getting worse, a dramatic increase from last month’s reading of 34%. US debt could still be downgraded. Keep in mind that US debt wasn’t downgraded in the summer of 2011 until after the debt ceiling issue was resolved.
And now for the good takeaways:
Chances are growing that tapering will be postponed until 2014. A hit to the economy is a double-edged sword. While it would be unfortunate to see economic growth decrease in the fourth quarter due to the shutdown, it means there’s a better chance that the Fed won’t begin paring its bond purchases until early 2014. And with a new, more dovish Fed Chairman, Janet Yellen, in place, the odds increase even more that tapering will happen next year.
While last week’s fiscal pact was only a stopgap, it’s unlikely that we’ll see another crisis like the one we just lived through. First, top Republicans are promising that there won’t be another shutdown. In addition, business leaders are outraged by the negative impact on the economy and blame the Tea Party. Corporate executives are already discussing plans to support GOP candidates who challenge Tea Party members in Republican primaries. This atmosphere should create a velvet fist that compels cooperation.
You can count on the Fed. You might think of the Federal Reserve as the fourth branch of government; one that’s far more functional and activist than some of the other chambers of government. The Fed, fearful that there would be a government shutdown, decided not to taper in September. In fact, since the Great Recession began, the Fed has shouldered much of the burden for trying to stimulate the economy. It has assumed the role of protector, a mantle that it’s unlikely to give up any time soon.
It could have been worse. Keep in mind that we weren’t actually going to run out of money on Oct. 17. However, there was a sense of urgency among most lawmakers that the issue had to be resolved before we hit that date. That sense of responsibility provides a glimmer of hope that, when it’s really needed, a majority of leaders will come together for what’s best for the nation. Most importantly, now that the crisis is over, these distractions are also over. It’s time to refocus on what’s important: fundamentals and meeting our long-term financial goals.
Bottom line: While budget battles and debt debates can cramp our investing styles, we’ve got to have the stomach to stay the course.
The takeaways:
The housing market continues to be the somewhat silent savior within the economy. Not only because of the wealth effect as described above, but also for the ripple effect of jobs created since housing and real estate related business have long tentacles throughout the job market. We firmly believe the Fed is aware of this and respects the economic power of the housing market. This is the place they’d be the most afraid to apply stress. With this in mind, whenever ‘tapering’ begins, we continue to believe it won’t have much impact on the mortgage bond market. Residential real estate will continue to enjoy a tailwind.
Sadly, as has been said here before, finding high quality jobs will only be more difficult in the years ahead. Part time work can be found. A job can be created; but a career is harder and harder to come by for those that have been a victim of the Great Recession’s joblessness. As investors, we have to set aside our feelings about this reality. The facts are that companies are doing more with less. No, this can’t last forever but it can last quite a while. In that period, their earnings will rise and their share prices most likely will follow.
Expect the Janet Yellen Fed (assuming she is confirmed) to act very similarly to the Ben Bernanke Fed. This most likely means a very accommodative stance. Bernanke has been extremely critical of the dysfunction in DC and has steered the Fed to act as a stimulus center to offset the headwinds provided elsewhere in government. Yellen is expected to share that view and act in the same fashion.
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