30 Sep 2013

Flash Update

US Debt Ceiling Concerns

There seems to be the usual nervousness in the markets due to the anticipated US government shutdown as a result of the impasse in Congress over reaching an agreement to raise the debt ceiling.

Raising the debt ceiling simply lets the US Treasury continue borrowing the money it needs to pay all its bills and other legal obligations in full and on time. Setting a debt ceiling is supposed to help Congress control spending.

However supporting a debt ceiling increase is always a tough vote for politicians as the parties try to wrangle concessions from their opponents in exchange for their support. Currently, many Republicans are now insisting that any increase in the debt ceiling be tied to spending cuts, a host of unrelated matters like the Keystone pipeline and the defunding and delay of Obamacare. Meanwhile, President Obama and the Democrats want a "clean" increase and insist they won't negotiate. Hence the deadlock.

Whatever the final outcome, markets are expected to remain volatile during this period. However as much as the media is likely to play up the US government shutdown's impact on markets, historical data suggests it is likely to be a

It may be interesting to note that since 1940, Congress has effectively approved 79 increases to the US debt ceiling. There have been 17 shutdowns since 1976, ranging in length from one to 21 days. None caused a market meltdown. The average decline in the Standard & Poor's 500 index during a shutdown lasting 10 days or more is about 2.5 percent. For shutdowns lasting five days or fewer, the average decline is 1.4 percent1.

Here's a table from Deutsche Bank that shows the performance of the S&P500, Treasuries and the dollar index prior, during and after the end of shutdown.

Portfolio Positions

Notwithstanding the news headlines, we intend to ride out this period of anticipated volatility and will maintain our current portfolio positions. We urge you to be calm and not let this bother you unduly. As always, we are maintaining an eye on the markets and will recommend taking the required changes if and when necessary.

1. “Why Investors Shouldn't Fear A Government Shutdown”; Associated Press, 28 Sep 2013

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