Portfolio Update - October 9, 2013

Noise


Dear Client Investor -

The recent double-threat chaos in Congress has been mind-numbing. The combination of a government shutdown which began last week over lack of an agreeable budget combined with an impending debt ceiling deadline next week which threatens the government’s ability to pay its debt obligations is almost unimaginable to those who regularly engage in logical thinking. Yet, despite the heavy posturing by the Tea Party in the House of Representatives, the likelihood is that this situation will resolve prior to the October 17 date when the Treasury will theoretically run out of money. Prior debt ceiling battles have been common, and while the dialogue around this “crisis” is particularly heated, this will most probably been seen as “noise” in the short term. While volatility will likely be high through all this, the middle and longer term prognosis for the economy is fairly good, with slow—to-modest growth expected to continue. Looking past this particularly chaotic episode, we expect a natural rise in long term interest rates to continue along with the tepid economic growth.

Although not impossible, the likelihood that the US defaults on its debt obligations is extremely low, with even strongly conservative entities putting extreme pressure on those entrenched in the House to recognize the potential damage of a debt default to the reputation the US Treasury and the world economy. But even if a resolution did not take place by the October 17th date, the payment of Treasury obligations would most likely take top priority, and would continue to be paid for several weeks, so a time buffer does, in reality, exist. Even given that, the probability of a resolution before the October date is extremely high, and in fact the door has opened finally for a longer term “grand bargain” budget and debt agreement, something much sought after but ultimately abandoned, late last year. We suspect that in a few short weeks clearer heads will prevail, and we’ll be in much better shape because of it.

Meanwhile, on a very positive front, we feel that President Obama’s selection of Janet Yellen as next Chairman of the Federal Reserve bodes well for those who see job creation and economic stimulus as important predicates in our economic future. Yellen is very vocal about her focus on this component of the dual Federal Reserve mandate of both managing inflation and maximizing employment. She also brings a formidable support system with her: both her husband, George Akerlof, and close friends Christine and David Romer, represent a formidable husband/wife foursome of tremendous credibility and capability. They all embrace strong Keynesian principles, recognize the important role of government, are Democrats, and represent a far cry from the Republican-dominated thinkers who have had the run of the Fed over the last several decades. That said, we don’t expect any radical changes in Fed policy immediately after Yellen takes over Ben Bernanke’s position in January. But she is a breath of fresh air for a Fed that needs to help force the nation’s leadership to press for greater income parity and middle and lower class income growth.

We continue to feel, despite numerous mixed economic signals, that the economy will continue to grow at a fairly slow rate, made slower still no doubt by any protracted government shutdown. Even still, strong economic fundamentals do, in fact, remain in place, particularly as reflected in the recent Federal Reserve minutes. We expect tapering of the Federal Reserve purchases (stimulus reduction) to take place before the end of the year, or shortly thereafter, indicating the Fed’s overall positive sense of economic directions. Long term interest rates, which still remain unsustainably low, are naturally expected to rise.

From an investment and portfolio point of view, shifting investments in anticipation of the current volatile market environment and anticipation of a US government default is unlikely to be of help to investors. Indeed, the likelihood is that investors who try to avert the volatility by selling into the market will suffer.

Despite considerable volatility and ultimately flat performance since May of this year, we see continued opportunity in equities, and have continued to stay the diversified course on equities, and keeping exposure to long term treasuries to a minimum.

Despite what may appear to be an oft-heard refrain when we speak to the various headline crisis facing the economy, we expect that over the next year this will appear as little more than statistical “noise” – a blip on the radar in economic terms. Both the economy and stock performance ride on the underlying fundamentals. In the case of equity markets, those fundamentals are based on profits and anticipated cash flows of corporations over the coming years. In the case of bonds, on credit and interest rate risks. Those fundamentals are currently fairly sound, yet providing just enough uncertainty and worry to keep from unreasonable prices. Hence, we are staying the course.

Once again, please feel free to call with any questions.


Peace,
Ron Stein, CFP

Good Harvest Financial Group
631.423.6501
rstein@goodharv.com

 

Disclaimer: each investor has different needs. The information herein should not be used to direct investment decisions without assistance. No guarantees can be made or implied in the above information.