The headlines this week are both loud and noisy: as a result of political gridlock within Congress, the U.S. government suspended operations on the first day of October and is now "closed for business." Is this news a cause for concern among Canadian investors?
While the shutdown is an urgent problem and its impacts will begin to be felt immediately in the U.S. economy,
it is actually a relatively-solvable piece of a much larger problem. This larger problem is the looming limit of the U.S. "debt ceiling," or the amount of debt that can be issued by the U.S. Treasury.
(In our September monthly update to investors, we noted that the U.S. debt ceiling may be reached again in October, renewing policymakers’ attention to this issue.)
Here’s why, in our view, the current crisis is of lesser concern for investors than the potential for breaching the debt ceiling: the impacts of the shutdown are limited--it principally affects U.S. economic growth--and while it is disruptive, there are, in fact, established precedents for resolving it to minimize this disruption over the long term.
The main point of contention between the parties is the scheduled implementation of ObamaCare, the informal name for the U.S. Patient Protection and Affordable Care Act—and public opinion polls will likely influence political positions on this issue over the coming days. The length of the shutdown will determine the impact on real economic growth in the U.S., but we believe the potential impact is already largely "priced into" markets. We note that the relatively mild market reaction to date suggests that most observers expect the shutdown will be resolved quickly.
Breaching the debt ceiling, in contrast, is without precedent, and also carries a much larger risk of longer-term disruption across the U.S. economy and globally. If the debt limit is exceeded, it will not result from financial incapacity on the part of Congress to "pay the bills," but rather an unwillingness to reach the political compromises required to do so. This human element adds a layer of complexity which makes gaining a clear line of sight on the outcome especially difficult.
Whatever the outcome of this debate over the next few weeks in the U.S., experience in global markets over recent years has shown that sustained political uncertainty leads to market volatility. Accordingly, if there is no resolution of the U.S. debt ceiling issue, we can expect to see increased market gyrations in the coming weeks. As a result, policymakers around the world will continue to focus their attention on monitoring this situation, and we, at MD, will be carefully watching along with them.
How can investors protect themselves against market volatility? As I commented earlier this month, our view is that the best strategy for individual investors is a diversified, tested investment strategy, tailored to your specific time horizon and purposes. While sources of market instability can and do change over time, the wisdom of this approach remains consistent.
As always, your MD Advisor is available to help you understand how global economic and market developments impact individual investors. If you have questions, I encourage you to contact your advisor.
William R. Horton, Jr., CFA
Chief Investment Officer
MD Financial Management Inc.