As the third quarter of 2013 came to a close, focus turned to Washington with the government shutdown and the looming November 1 debt limit. As we write this, it remains to be seen how the competing factions will come to a resolution or if they’ll just end up kicking the can down the road, as they have done so many times in the past, without making any real compromises on the underlying issues. From 1976 to 1996, the government shut down 17 times, spanning a total of 110 days. Historically, government shutdowns have had no detectable long term effect on the markets. The last, and longest, shutdown doesn’t appear to have hurt the economy. That was mid-December 1995 until early January 1996, a three-week shutdown under President Clinton. The year before the shutdown, real GDP grew 2.3%. In the fourth quarter of 1995 it grew at an annual rate of 2.9% and then during the first quarter of 1996 it grew at an annual rate of 2.6%. This was despite the shutdown and the East Coast Blizzard in January 1996, which was then followed by large floods.
While headline news will have short term effects on markets, over the long term, economic conditions and the direction of corporate profits will have the greatest and most long-lasting effects on portfolios. Economic conditions have been slowly and steadily increasing over the past few years, and now Europe seems to have stabilized and may be beginning to experience modest growth. China’s new leadership is working to transform that country’s economy from being export-oriented to one that is more focused on increased consumer consumption. This will have a major impact on the future of global trade.
As we have said for several quarters now, we continue to remain optimistic about stocks and cautious on bonds. Even though the Federal Reserve has indicated that they will not begin easing until the economy improves, and they have spelled out what they’ll consider improvement, just the mere mention by the Fed of future rate hikes sends bonds tumbling. As we said last time, we think that the Fed being able to remove itself from the equation of the U.S. recovery is a net positive, not a net negative. Additionally, we now have the November 1 debt ceiling looming, which could send both stocks and bonds oscillating as politicians and pundits take to the airwaves to bring a little “Halloween cheer” (sarcasm alert). We think a last-minute deal will be struck to avoid any real damage, aside from the emotional toll imparted upon people who watch the news or the stock markets very closely.
Whatever comes our way, we are always positioning our portfolios to participate in further market gains and to cushion any market declines. Over the long term the trend is up. Please call if we can be of any other assistance to you or someone you care about.