“Patience in Market is worth Pounds in a year.”
– Ben Franklin
In light of the conversations among media outlets this past month, I’d like to revisit the debt ceiling and government shutdown issues that have been lingering for several years. After hearing our thoughts on the subject during discussions the past few months, several clients needed more reassurance and a few even asked why we seemed so detached given the severity of the situation.
I assure you we watch everything closely and this most recent “crisis” was no exception. I personally kept a close eye on the bond market because it would be the first to reflect a global concern of the United States’ credit worthiness. If others thought the U.S. government might miss an interest payment on its Treasury bonds, the bond market would have gone berserk; in reality, it was very calm. In fact, interest rates dropped.
Remember: the U.S. government can borrow money at 2.5% for a 10-year loan, which is incredible. That isn’t the rate of a perceived high-risk borrower, but one that reflects a vote of confidence the lender will be paid back.
Moreover, despite the enormous debt our country has piled on during the past 10 years, interest payments on debt as a percentage of GDP (3%) is lower than what we were paying in the 1980s. That means, as a proportion of our income, we pay very little to service our debt. It’s no different than you buying a bigger house because the cost to borrow drops. It doesn’t mean high debt levels are a good thing. I’m simply saying it isn’t a concern now and we have time to pay it down.
In other words, this entire debacle is a minor speed bump on your investment journey in my opinion. Avoid getting drawn into the hoopla.
As always, we invest in companies; not governments. A shutdown can impact the stock market, but only in the short run. Five years from now, you won’t even remember this. And that’s how we invest your portfolio.
Based on how we view the next five to 10 years, I can promise you that during that time, all kinds of “events” will impact the market and it will rise and fall depending on how positive or negative the news. “News” is a relative term though. With all the competition in how we view news in this technological world (e.g., computers, cable channels, mobile phones, ipads), media outlets use dramatic language, ominous music, and other tactics to suggest to investors that financial disaster is just around the corner. Unfortunately, these tactics work. People tune in, become scared, and make short term decision in their portfolio. Most of the so called “crises” are short term and have no lasting effect on the long term direction of the stock and bond markets. The investors who win are those who see these speed bumps as short-term opportunities to add more money to their portfolios. As Ben Franklin mentions above, it will be worth “pounds” in future years.
With all that said, stock market performance has been incredible this year. The MSCI all-world market is up more than 22%. And in September, bond and stock markets were surprised by the Fed’s U-turn on monetary stimulus in which it decided to stand pat instead of easing up on its bond purchases. This is good because lower rates will help the economy keep moving.
The bad news is U.S. blue-chip stocks have gotten a little pricier this year, given 6% in yearly earnings growth and 20% advance in stocks. For this reason, we’re adding more funds to your portfolio that favor very profitable companies (i.e., the ones with great margins and good cash flow). Such companies have more attractive valuations and will provide some downside protection in a stock market downturn. They also do well in the good times.
I hope this gives you an idea of where we stand. As always, feel free to call or email your advisor if you want to discuss.
Lane Steinberger MBA, CFA, CFP®
Partner, Chief Investment Officer