- The only difference between death and taxes is that death doesn’t get worse every time Congress meets. Will Rogers Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself.
- After the usual August recess Congress has returned to Washington facing a number of pending issues ranging from what action to take with Syria to Obamacare funding. Two critical deadlines are pending with regard to operating the government. First, Congress has appropriated funds to keep the federal government operating only through September 30, 2013. If Congress does not appropriate additional funds during September, on October 1st the federal government will shut down. House Speaker Boehner has said he will propose short-term “stop gap” legislation without conditions that would fund the federal government for a few more months at 2013 levels. Whether or not a short term solution is passed we feel a government shutdown is unlikely for political reasons.Even if a government shutdown is avoided – either in the near term or via a permanent solution- Congress will still have to deal with a second deadline. The United States government has once again hit its borrowing limit. Congress had authorized the federal government to borrow only through May 18, 2013. Since that date, the government has continued to operate using current tax receipts and funds in accounts set aside for future expenses. According to the Treasury Department, by mid-October the government will need to borrow additional funds to pay its bills, including interest on its outstanding debt. By that time, Congress will have to raise the debt limit or the United States, unable to borrow to pay interest; will default on the national debt.
We feel it is extremely unlikely that Congress will allow the United States government to default on its national debt. Most likely a compromise on how to fund the government will be reached. How will all this affect the markets? The last debt limit crisis, in August 2011, produced a difficult month for the markets in what was otherwise a strong year. Any uncertainty combined with media hype is likely to impact the markets in the short term.
It is interesting to note, however, that the implementation of the “sequestration” spending cuts did not really slow down the market run-up this spring despite dire predictions in the press. This is indicative of the strength in the markets. None-the-less the dual issues of a government shutdown and debt default–fueled by predictably overwrought media reports of Washington malfunction–could roil the markets, particularly if the government does shut down. This will be against the backdrop of the Obamacare spending debate and any other current issues.
A volatile fourth quarter may be in store but we do not think people should make changes to their portfolios in anticipate of a market drop. Trying to time markets is difficult if not impossible. We believe that any downturn based on Washington dysfunction should be temporary, reversing when a compromise is reached. The underlying fundamentals of good corporate earnings and high levels of cash remain in place. When there is a disconnect between perceptions and fundamentals an opportunity can exist for investors. In this regard market volatility due to a perception of Washington dysfunction could be a buying opportunity. As always we recommend keeping enough cash on hand for any near term (12 – 18 month) expenses. By doing so short term market volatility should not be an issue.
As always please contact any advisor on our team with questions, concerns or whenever we may be of service.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James.