Debt Ceiling Worries – We’ve Seen this Problem Before

When the clock struck midnight on September 30th the government shut down and the political blame game went into overdrive.  Congress could not reach an agreement on a new spending bill to keep thousands of federal employees on the job and federal programs running.  That issue is now being rolled into the next major political stumbling block, the debt ceiling.  The Treasury announced that the government would not have sufficient money to pay its bills unless congress agreed to increase the amount the government could borrow by October 17th.  If an agreement is not reached the U.S. would likely not be able to pay its creditors and would default on its debt.

We have seen this political brinksmanship before.  In July of 2011 Congress waged a similar battle putting the U.S on the verge of defaulting before coming to an agreement.  Due in part to the late hour that the agreement was reached S&P downgraded the U.S. long term debt rating from AAA status.  From the time when the issue started building through the downgrade the U.S. stock market fell roughly 16%.  However, U.S. stocks bounced back and more than made up for the losses in a few months.  Also, U.S. government debt rose in value prior to and after being downgraded.  It shows that in times of uncertainty U.S. government debt remains the ultimate safe haven.

The markets have performed similarly this time around.  U.S. stocks dropped 2.4% from late September when it became apparent that the government would shut down and a debt ceiling deal would not come easy.  However, the fall has been noticeably less given investors experience with 2011 and the numerous other recent standoffs.  The 10 year Treasury yield, a benchmark level for U.S. Treasury bonds, has remained in a 0.05% range over this same time period.  If there was significant fear that the US would default and not make its debt payments the yield would be rising significantly to compensate investor for holding the bonds.

It appears a short term agreement is close to being reached, which would provide at least temporary relief. While the next fight may turn out differently, we are confident that U.S. government debt will continue to be a safe haven investment.  In portfolio construction, RWM designates the fixed income side of the portfolio to seek to preserve capital and provide stability, while the equity side of the portfolio purses growth.  When volatility spikes on the equity side the fixed income allocation will be there to provide support.

It may be tough to stay true to your investment policy during these uncertain times, but historically those who stay steadfast to a sound investment allocation are the ones who see the best long term performance.

Index Performance                                    Sept      3Q    YTD     Trl 1 Yr      

US Stock (Russell 3000)                                3.72%    6.35%  21.30%   21.60%       
Foreign Stock (FTSE AW ex US)                  7.02%  10.16%   10.39%   17.12%       
Total US Bond Mkt. (BarCap Aggregate)     0.95%   0.57%  -1.89%    -1.68%        
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.49%  0.44%  -0.06%    -0.00%
Municipal Bonds (BarCap 1-10yr Muni)       1.31%   0.72%   -0.63%   -0.34%
Cash (ML 3Month T-Bill)                              0.00%  0.02%   0.06%      0.10%      

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.
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