Debt Ceiling Focus
Investors appear to be factoring in a credit downgrade of the United States Debt and are asking, “What might be the economic impact of such a downgrade?” Certainly, any downgrade would cause the United States to have to pay higher rates to investors in order to compensate them for a higher “risk premium” on our Treasury Bonds. Ultimately, this could lead to a deterioration in investor confidence and make it more difficult and costly to solve our fiscal problems.
As of this writing the stock markets have opened lower (Source: wsj.com). The downturn in stock markets does not appear to be “panic selling” as a result of the debt ceiling issues. The selling today seems to be driven by the economic data that indicate our economy has essentially not grown throughout 2011. According to data published in the Wall Street Journal, consumer spending was disappointing and the high jobless rate continues to dampen any recovery.
While corporate profits have by and large met expectations (much of the earnings growth has been driven by overseas sales), the lack of consumer spending and stubbornly high unemployment rates are painting a picture of a stagnant recovery. Worries are beginning to surface that any recovery may have peaked and that we could be headed for another recession.
Looking more closely at the debt ceiling issue, if a deal is reached between Congress and the White House to increase the debt ceiling, it simply means our government will continue to sell US Treasury debt to raise the money (i.e. print money) it needs to continue paying its bills. If this occurs, the markets could experience a short-term rally. However, the depth and sustainability of any such rally will be based in our opinion primarily on the severity of any credit rating downgrades and overall economic strength. Realistically, we do not expect any “deal” to adequately address the real problems associated with our nation’s burgeoning debt. Ultimately, we anticipate a downgrade in the credit quality of the US below its current “Triple A” status before the election in 2012.
A failure to raise the debt ceiling could result in an actual or implied default whereby our government fails to make payments on its obligations. This scenario in our view expedites the deterioration of investor confidence globally and would immediately drive up our borrowing costs.
Either scenario in not particularly attractive and though it could be possible to see a relief rally in the markets, should a deal get done, it is equally possible that we would see continued turmoil with both stocks and bonds potentially being driven lower. Tangible assets such as gold could have the potential to move higher under such a circumstance.
Absent a deal that meaningfully addresses the debt issues of our nation, we see the only difference between the two possible scenarios to be the speed at which we feel the consequences.
It is nearly impossible to know what the implications might be from the current debt negotiations in the near or longer term time periods. At Lowe Wealth Advisors, we want you to know that we are actively monitoring the situation, and as appropriate, making shifts in our discretionary accounts toward potential preservation.
Bear in mind that in many of our allocations we hold gold and have recently reduced equity exposure. In addition to that we added a position that has the potential to move in the opposite direction of the equity markets. Last quarter, we shifted out of higher risk high yield bonds on signs of growing economic weakness into shorter term high quality corporate bonds.
As appropriate, we will take steps which may have the ability to protect capital. We recognize that moving toward a capital preservation strategy could cause our performance to lag benchmarks in the event that we see a significant move higher in the equity markets. Given the landscape and the level of uncertainly, we believe that in most cases, shifting toward a posture that favors potential preservation is most appropriate.
Should the market drop significantly, Lowe Wealth Advisors may seek buying opportunities. If we do see continued weakening economic data, the areas we may consider at an appropriate time could include the utilities sectors, the consumer staples sector, certain commodities and a continued focus on dividend paying stocks. We recognize that these are challenging and uncertain times and we will continue to communicate with you regularly over the coming days. As always, should you have any questions or want to speak with us directly, please email or call the Lowe Wealth Advisors team.
This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors. Any opinions expressed are current only as of the time made and are subject to change without notice.
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