How to handle your money during this artificial, man-made crisis
What’s a struggling (and angry) investor to do, in the face of a government shutdown and threatened default? An artificial financial crisis (not based on fundamentals) cooked up entirely for political gain.
Prior to the shutdown, the economy was gathering steam — more jobs, higher profits, more homebuilding, low interest rates, low inflation, higher stock prices, and higher business and consumer spending. Now that the GOP is randomly dropping bombs on American businesses, incomes, pre-schools, and transportation systems, growth will slow, along with the jobs and tax revenues that would otherwise have been produced. If Congress actually drives us over a cliff, stocks and the value of the dollar could collapse and interest rates soar. Rates on short-term Treasuries have jumped already, and the dollar is down.
If the debt ceiling isn’t raised, Obama has some flexibility to pay the government’s bills for a very short time. The market might waiver and wait for a couple of days, hoping that the grown-ups will finally take charge. But you never know.
The reigning Tea Party wing of the GOP doesn’t care if the economy sinks. They believe that their base will blame Obama because it happened on his watch. The GOP will then run against the “Democrat recession,” even though the GOP manufactured the downturn out of thin air.
If the GOP comes to its senses, stocks and the dollar will almost certainly spike up. Still, that won’t last if the deal is only temporary. As long as one political faction thinks that the government shutdown is “fun” (as one ignorant Congressman said) and that defaults on Treasury debt don’t matter, investors can’t make decisions with confidence.
At the moment, the best advice is probably to do nothing. You might take a tip from global investors, who clearly believe that the U.S. won’t default. Interest rates are up a hair on 10-year Treasuries but, as of this writing, the market is pretty calm.
If individual investors sell everything and hide in zero percent bank accounts, and the global investors are right, you’ll have sold at a low. By the time you reinvest, prices will be up.
The shutdown is already tamping down business — we don’t know for how long. Unemployment is up, spending is down, new mortgages can’t go through until the FHA reopens, and business transactions that need government stamps are frozen. Trade is also suffering as ships pile up in port, waiting for federal inspectors to return to their jobs. GDP growth will be slower than otherwise would have been the case. But the pro-growth, low-interest-rate policy of the Federal Reserve will almost certainly continue, to offset some of the damage the shutdown continues to inflict on American workers.
Whatever happens, this crisis — a purely artificial one, manufactured entirely for political gain — should remind you of fundamentals. For safety and comfort, you need savings on hand. (Maybe a crisis will be manufactured again.) You need stocks for long-term growth, but should make sure that the percentage in stocks is suitable for someone your age. And you need diversification into international stock funds — the markets in Europe are rising up and look like good value. Also consider international bond funds invested in the debt of stable foreign governments. They’re picking up some investors leaving the Treasury market.
Because this crisis is artificial (unlike the financial collapse in 2008), I’m assuming that any plunge in the markets can recover quickly. But something else to build into our thinking is that the power of those attacking government stability is stronger than anyone might have thought.