The Debt Ceiling and Deficits
The US debt ceiling is all over the news right now and controlling the investment markets as well. Since it understandably has most people concerned, us included, we thought it would be a good time to share some thoughts and investment direction. Hopefully this will help provide some peace of mind.
There are really 2 different parts of the debate:
1 – The actual debt ceiling that we are about ready to bump up against.
2 – The projected budget deficit we are running and building up.
The debt ceiling itself is really the smaller of the two items, as everyone knows it will need to be raised no matter how austere we want to get. But the debt ceiling is the catalyst event for the larger budget and projected deficit debate. In other words, if we are going to raise the debt ceiling, then let’s put some stipulations in place to try and change the unsustainable debt building free fall we are on. It would be no different than one spouse saying to another, before we apply for a credit card balance increase, since we are up against the limit and have bills to pay, let’s work out a plan to change our income and expenses so we start to pay this down instead of borrowing more. This debate is important as bond rating agencies are already threatening to downgrade our US bonds if we don’t improve those deficit projections, yet each side has differing thoughts on how to do this. In an over simplification, Republicans want to reduce expenses and Democrats want to increase taxes. Thus, here we are getting very close in a game of chicken.
One other item before turning to our investment plans. There is a lot of speculation on what won’t get paid if no deal is reached by the deadline. From all my research nobody knows exactly. Multiple plans are being talked about, but no one knows for sure at this point. Legislation has already been presented to continue to fund social security payments, as well as other ways to keep them intact. I seriously doubt that social security payments would be held up, with all the political backlash that would bring. I would not let that concern you, but we will be ready to help with any cash needed from your account(s) should things get crazy.
On the investment side, I believe we stand at a big Y in the road that doesn’t have much middle ground. If no agreement is reached, most believe that stocks will fall, bonds could decline some, and gold would climb higher. On the other hand, any kind of agreement will relieve this current overarching concern and most think stocks would jump, as earnings reported in July have been good. We are not planning any allocation changes at this point. Our Moderate and Conservative portfolios intentionally hold smaller percentages of stock. Even with the stock market -1.5% in July through July 28th, our Conservative and Moderate Portfolios are up .5% and .3% respectively. In addition, we don’t want to make a move that would keep us from experiencing a good jump if an agreement is reached. However, we are still tracking the Bear Market Indicator we have discussed before. If it were to hit, then we would move at that time to protect against further, more significant declines. You can read more about that Indicator here, and know that a Friday close of the S&P500 below 1159 would most likely cause its trigger.
Remember, God is in control. Plus, any short term difficulties to fix our long term problems would be worth it in the end.
Hope this information brings some peace of mind. Thanks for allowing us to serve. Feel free to pass this along to anyone you think would benefit. If we can help anyone that you know with Investment Management or Financial Planning, we would love the opportunity.