The US Govt Debt Downgrade, Debt Ceiling and You

As I write this on Sunday evening, August 7th, the financial markets and economic news have been extremely volatile and mostly negative over the past 10 days. As always, it is important to take a step back and try to look at events with perspective.

First, the US Government spent weeks haggling over raising the Federal debt ceiling. What is normally a routine process became a very tumultuous one.

The impact: in the short run, the uncertainty of whether the issue would be resolved caused the stock market to decline, prior to the agreement between Congress and the President. In the longer run, the process and agreement has heightened the public awareness of the need for national fiscal responsibility, which is good. (Similarly, Ross Perot raised this awareness before Bill Clinton’s first election, which resulted in many economic positives, such as lower interest rates and good stock markets).

Downgrading of US Government debt by Standard &Poors: The possibility of this action had been rumored, but not widely realized by the general public. Thus, it is likely that financial markets will react negatively to the news.

The impact: This is interesting to consider. If “Wall Street” had an inkling this was to occur, interest rates would have risen or would be rising. Interest rates have done the opposite. Interest rates have been steadily falling, particularly in the past few months. The 10 year Treasury has declined from 3% at the beginning of the year to around 2.45% as of last Friday.

The impact of the downgrade may be long-term positive, if it causes Washington leaders of both parties to realize they need to compromise their hard line positions. Standard & Poors was correct, as they cited the negative political climate and ineffectiveness of Washington in their reasoning. We don’t expect the US to default on any Treasury securities. However, the current deal does not make many specific decisions. The really tough decisions are handed to a committee. The huge reductions are delayed toward the end of the 10 year period. And most importantly, the actual deficit is not declining. The agreement is only slowing the rate of growth in the deficit. Thus, the downgrade may force US leaders to actually work on making those tough decisions, and making them stick. If that occurs, that would be real progress.

Oil prices have been declining, and sharply in the past week. The price of oil per barrel was recently in the $95-100 range and is now trading around $84/barrel. This is due to the anticipated decline in the economy, as well as trading factors (normal volatility). Thus, gas prices should remain well below $4, and may go below $3.50 per gallon soon. This is good for the consumer and will provide some needed stimulus to the economy.

Impact to investors:

In tough times, it is good to reflect on the basics, our core fundamental philosophies and consider the thoughts of those we respect the most. With that in mind….

We believe in focusing on the long-term and on matters that we can control. Thus, it is not a winning strategy to try to time the market in the short-term.

I don’t think Warren Buffett is waking up Monday ready to sell stocks because of the US debt downgrade. He often says, and has profited from, buying when others are scared (during market declines). It is better to buy when there is fear and sell when others are being greedy. Thus, we would be more inclined to be buyers than sellers now.

It is vitally important to be properly allocated and have a globally diversified portfolio. Properly allocated means having ample cash or fixed income assets, to financially and psychologically handle markets downturns. We work with our clients to have such written strategy plans in place.

One of the greatest benefits that we can assist our clients with is just talking to them, to discuss these events, so they can better understand them and the impact they can have on their personal lives. It is our goal that our clients be able to have greater financial comfort and security, as well as peace of mind.