The impending shutdown of Federal government services is unlikely to have much impact on capital markets, or leave much of an imprint on the U.S. economy.
History shows that, after previous shutdowns, backdated wages are paid and there is little hit to aggregate consumption. It is highly unlikely that debt interest, or capital repayments, will be halted (indeed, the yield on one-month Treasury notes at 5.44% has barely moved since late July).
Goldman Sachs think a shut down will end after 2-3 weeks, with pay day for active military personnel (October 13) triggering its conclusion. The bank estimates a hit to GDP of 0.2 percentage points a week to Q4 numbers. This is not insignificant, but even if we, as investors, knew in advance that three weeks of shutdown were coming, it is not clear how one might respond.
The potential hit to near-term GDP may persuade some to make an asset allocation call (sell equities, buy cash perhaps?).
But should investors be out of economically-sensitive assets when the backdated pay checks are cashed and the money spent?
Big Picture worries
For Big Picture analysts, there is of course the worry that the shutdown is symptomatic of a broader problem facing the U.S. – that of poor governance and massive public debt, themes that could intertwine to cause mayhem at some point in the future.
The shutdown is, after all, a re-opening of June’s Fiscal Responsibility Act that Congress agreed to and President Biden signed off in June. It was supposed to put the debt ceiling debate on hold for two years.
No other major economy goes through the same odd process as the U.S., whereby the legislative body approves a budget, but allows itself the right to re-open negotiations later, with the threat of not supplying the necessary funding. Often for political grandstanding, rather than any real commitment to budget discipline.
The debt rating agency Moody’s issued a report earlier this week, in which it noted that a shutdown would: ‘underscore the weakness of U.S. institutional and governance strength relative to other AAA-rates sovereigns’. And it showed ‘the significant constraints that intensifying political polarisation put on fiscal policy making at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability’.*
This echoes the ‘erosion of governance’ complaint made by Fitch, in August, when it stripped the U.S. of its AAA rating.**
It is worth remembering that one explanation for China’s current slow economic growth is the burden of debt, much of which was acquired in the period of the global financial crisis to boost growth. Is the U.S, falling in the same trap today, with future interest and capital repayments likely to weigh down on U.S economic growth and investor returns?
This was the subject of the most talked about paper delivered at August’s Jackson Hole conference of central bankers, by Barry Eichengreen of Berkley. It discussed the limited options that western governments have in brining down debt over the coming decades and the negative impact of large debt burdens on growth.
Big picture stuff, interesting and worth considering for long-term strategic asset allocation perhaps. But not enough to warrant an immediate re-allocation of assets within an investment portfolio.
What’s it all about?
A cynic might say that Republicans in Congress are being bullied by extremists in their party. The Freedom Caucus’ scorched earth approach to politics is about winning Donald Trump’s blessing ahead of next year’s elections and it includes persuading other Republicans to act in the same way out of fear of Trump’s disapproval.
They have a fig leaf. Republicans in the House argue that the budget caps previously agreed are now too high, given the expected doubling of the budget deficit to a massive $2 trillion next year (around 7.4% of GDP – record for the U.S. outside of wartime or recession).
This is a reasonable point, though somewhat undermined by Republican nonchalance to deficits when they control the White House.
Unfortunately for Kevin McCarthy, Speaker of the House, Republican members struggle to agree amongst themselves where the cuts should fall. Nervous of attacking entitlements, such as Social Security, or defence and spending on veterans, the cuts must -by definition- be borne by discretionary spending items. These, such as transport and education, take up around a quarter of total spending, so will suffer disproportionately…yet are low in the lists of where Republican voters believe spending cuts should be made.
Meanwhile, some members of the Senate, which is narrowly controlled by the Democrats, hope that a re-opening of the budget debate will lead to a rise in the previously agreed spending caps. Given the size of the existing deficit, the cyclic mentioned above might wonder if some Democrats have lost the plot.
It is hard to see an agreement being reached by Sunday October 1 and how the shutdown might impact capital markets in the near term.
Investors should maintain a broad, balanced exposure to different asset classes and regions. Financial history show that this is approach delivers the best risk-adjusted returns over the long term.
At Brite Advisors USA, we work with UK ex-pats all over the USA on their investment needs, both retirement and non-retirement. Our US-based advisory team seeks to provide an outstanding experience for all clients.
We facilitate UK pension transfers using UK Self-Invested Personal Pension Plans (“SIPP”) provided by UK-regulated pension trustees for clients who want to save for their retirement by taking advantage of potential stock market growth.
No Investment Advice: This financial commentary is for informational purposes only and is not intended to be, and should not be, construed as an offer to sell or a solicitation of an offer to buy any security or financial instrument or invest in any equity or investment strategy. It should not be used to form the basis of any investment decision.
Investment Risks: There are risks associated with investing in securities and past performance is not indicative of future results. Always seek professional advice before investing. Investment suitability must be determined individually for each investor and any financial instruments/strategies described in this financial commentary may not be suitable for all investors.
Not Legal/Tax Advice: This financial commentary is not intended to be, and should not be construed as, legal, regulatory, tax, or accounting advice. Always seek professional advice and consult with your legal counsel, tax and accounting advisors when contemplating any course of action.
Third-Party Websites: This financial commentary may contain or reference links to websites operated by third-parties. These links are provided as a convenience only. Such third-party websites are not under the control of Brite USA and Brite USA is not responsible for the content of any third-party website or any link contained in a third- party website. Brite USA does not review, approve, monitor, endorse, warrant, or make any representations with respect to third- party websites. Brite USA is not responsible for the information contained in such third-party websites or for your use of such third-party websites. Access to any third-party websites is at your own risk.
Brite USA does not provide tax advice. To the extent this financial commentary mentions or references any tax matter, it is not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party the matter addressed herein. Please consult an independent tax advisor for advice on your particular circumstances.
Discover the pros and cons of timing the market vs. time spent in the market. Explore the emotional challenges, risk factors, and potential returns of these investment strategies to make informed financial decisions.
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors
Taking Stock: The government shutdown – not clear how it is relevant to investors
The impending shutdown of Federal government services is unlikely to have much impact on capital markets, or leave much of an imprint on the U.S. economy.
History shows that, after previous shutdowns, backdated wages are paid and there is little hit to aggregate consumption. It is highly unlikely that debt interest, or capital repayments, will be halted (indeed, the yield on one-month Treasury notes at 5.44% has barely moved since late July).
Goldman Sachs think a shut down will end after 2-3 weeks, with pay day for active military personnel (October 13) triggering its conclusion. The bank estimates a hit to GDP of 0.2 percentage points a week to Q4 numbers. This is not insignificant, but even if we, as investors, knew in advance that three weeks of shutdown were coming, it is not clear how one might respond.
The potential hit to near-term GDP may persuade some to make an asset allocation call (sell equities, buy cash perhaps?).
But should investors be out of economically-sensitive assets when the backdated pay checks are cashed and the money spent?
Big Picture worries
For Big Picture analysts, there is of course the worry that the shutdown is symptomatic of a broader problem facing the U.S. – that of poor governance and massive public debt, themes that could intertwine to cause mayhem at some point in the future.
The shutdown is, after all, a re-opening of June’s Fiscal Responsibility Act that Congress agreed to and President Biden signed off in June. It was supposed to put the debt ceiling debate on hold for two years.
No other major economy goes through the same odd process as the U.S., whereby the legislative body approves a budget, but allows itself the right to re-open negotiations later, with the threat of not supplying the necessary funding. Often for political grandstanding, rather than any real commitment to budget discipline.
The debt rating agency Moody’s issued a report earlier this week, in which it noted that a shutdown would: ‘underscore the weakness of U.S. institutional and governance strength relative to other AAA-rates sovereigns’. And it showed ‘the significant constraints that intensifying political polarisation put on fiscal policy making at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability’.*
This echoes the ‘erosion of governance’ complaint made by Fitch, in August, when it stripped the U.S. of its AAA rating.**
It is worth remembering that one explanation for China’s current slow economic growth is the burden of debt, much of which was acquired in the period of the global financial crisis to boost growth. Is the U.S, falling in the same trap today, with future interest and capital repayments likely to weigh down on U.S economic growth and investor returns?
This was the subject of the most talked about paper delivered at August’s Jackson Hole conference of central bankers, by Barry Eichengreen of Berkley. It discussed the limited options that western governments have in brining down debt over the coming decades and the negative impact of large debt burdens on growth.
Big picture stuff, interesting and worth considering for long-term strategic asset allocation perhaps. But not enough to warrant an immediate re-allocation of assets within an investment portfolio.
What’s it all about?
A cynic might say that Republicans in Congress are being bullied by extremists in their party. The Freedom Caucus’ scorched earth approach to politics is about winning Donald Trump’s blessing ahead of next year’s elections and it includes persuading other Republicans to act in the same way out of fear of Trump’s disapproval.
They have a fig leaf. Republicans in the House argue that the budget caps previously agreed are now too high, given the expected doubling of the budget deficit to a massive $2 trillion next year (around 7.4% of GDP – record for the U.S. outside of wartime or recession).
This is a reasonable point, though somewhat undermined by Republican nonchalance to deficits when they control the White House.
Unfortunately for Kevin McCarthy, Speaker of the House, Republican members struggle to agree amongst themselves where the cuts should fall. Nervous of attacking entitlements, such as Social Security, or defence and spending on veterans, the cuts must -by definition- be borne by discretionary spending items. These, such as transport and education, take up around a quarter of total spending, so will suffer disproportionately…yet are low in the lists of where Republican voters believe spending cuts should be made.
Meanwhile, some members of the Senate, which is narrowly controlled by the Democrats, hope that a re-opening of the budget debate will lead to a rise in the previously agreed spending caps. Given the size of the existing deficit, the cyclic mentioned above might wonder if some Democrats have lost the plot.
It is hard to see an agreement being reached by Sunday October 1 and how the shutdown might impact capital markets in the near term.
Investors should maintain a broad, balanced exposure to different asset classes and regions. Financial history show that this is approach delivers the best risk-adjusted returns over the long term.
Sources:
*https://www.reuters.com/markets/us/moodys-warns-us-government-shutdown-would-be-credit-negative-2023-09-25/
**https://www.reuters.com/markets/us/fitch-cuts-us-governments-aaa-credit-rating-by-one-notch-2023-08-01/
Ready to find out more?
At Brite Advisors USA, we work with UK ex-pats all over the USA on their investment needs, both retirement and non-retirement. Our US-based advisory team seeks to provide an outstanding experience for all clients.
We facilitate UK pension transfers using UK Self-Invested Personal Pension Plans (“SIPP”) provided by UK-regulated pension trustees for clients who want to save for their retirement by taking advantage of potential stock market growth.
Contact us today to find out more.
Disclosures:
Recent posts
Timing the Market vs. Time Spent in the Market: An Analysis
Discover the pros and cons of timing the market vs. time spent in the market. Explore the emotional challenges, risk factors, and potential returns of these investment strategies to make informed financial decisions.
Taking Stock: the Fed versus the Black Knight
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors
Taking Stock: The Middle East & the soft-landing conundrums
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors