US Shutdown & Debt Ceiling – What Next!

Jase

The current volatility in the markets, concerns over the shutdown, its impact on growth in the US and the potential for the US to default on its debt repayments if the debt ceiling is not raised suggests to us that valuations will be hurt over the coming weeks.

However, be careful if you are in cash, the upside potential this time is greater than the downside risks and if you try and trade this, as a day trader, it could be costly. For that reason we are not going to try.

We are not going to try and be opportunistic on this volatility.  Unlike the Syrian situation, where we believed that the risk of a market pull back was greater than a market rally, today we believe there is more chance of a market rally after a market fall; but in rapid succession.  As this will be caused by politicking, trying to time and determine this is impossible and the swing will be so fast in both directions, we feel it is better to hold tight, and accept the pain.

Why so confident?

We say this based on the assumption that the US congress has to reach an agreement on the debt ceiling, otherwise the US will default. This has never happened, as such we do not expect it to happen this time either.

It is also worth noting that a shutdown of the U.S. government may reduce fourth-quarter economic growth as federal workers from park rangers to telephone receptionists are on unpaid leave, according to Moody’s Analytics Inc.  Mark Zandi, the chief economist at the firm, a three-to-four week shutdown would cut annualised growth by 1.4 percentage points. He projected a 2.5% annualised pace of fourth-quarter growth without a shutdown.

The fact that the US has shut down will in our opinion reduce the Feds appetite to reduce QE and we no longer feel that it will be reduced until the spring of 2014.

Once the agreement is given, all of the above factors will result in a strong upswing in equities!  However, we do continue to watch and be cautious because if it does go wrong and the impact is that the global recovery is stopped in its tracks, we will become protectionist again.  Therefore, if you do not have the appetite to ride the rollercoaster and want us to be actively protectionist tell us, because we are not intending to do anything, but keep you informed, watch listen and see through the mist.  It will therefore be painful the week of the 17th and in the intervening period.

A Final Note!

As a final note I would like to congratulate Jo Callow who has got married and is now Called Jo Hardwick, so please wish her well.