Allan and Doris, retired, income-oriented clients from Arizona, called recently, wanting to know how a “government shutdown” would impact their financial lives. They sounded exasperated, having listened to hours and hours of media commentators talking about an elusive “government.” Ongoing reports ominously attacked an inhuman government not meeting deadlines. Republicans and Democrats cleverly shift the focus to what the government has irresponsibly taken from us. Friends and neighbors fearfully commented on how that evasive government is unremittingly taking from the “cookie jar” for their benefit and not ours.
We shared that there are two ways to answer their question. And both are really important!
1. The Financial perspective … There have been 17 government shutdowns since 1976. On the average, the major U.S. stock market indices have increased approximately 12 percent over each of the following 12 months. (Keep in mind that today, bank certificates of deposit are paying interest mostly under 1 percent, and 10-year U.S. Treasury bonds are paying interest under 2.7 percent … both paying less than the average inflation in the United States … so principal going net “backwards”.)
Many sophisticated investors are lessening (but not eliminating) their exposure to government and corporate bonds and turning to securities holding convertible loans. Invesco’s Chief Economist Richard Golod reminds us that the U.S. stock markets’ prices do not necessarily reflect emotional, short-term changes in politics or the economy. Orders to U.S. suppliers are rising, housing prices are rising, and most U.S. corporations are by and large healthier today than five years ago. Our exports are up, and our balance of trade is improving. Through the first seven months of 2013, U.S. exporters sold $130.3 billion of goods and services to Mexico, which was double the $63.8 billion that American firms exported to China (Commerce Dept. 10.7.13). Sectors showing momentum are energy, health care and financials, and since Aug. 27, the strongest sector is emerging markets equities. As a matter of fact, many believe that when there is an increase in investor confidence (like now) in both the stock and real estate markets, there is a decreased confidence in commodities, such as gold and silver. We now watch gold and silver prices continuously plunge, with no expectation of a near-term recovery. Economist Golod underlines that most Americans have not changed their lifestyle or purchasing habits during our government shutdown. Golod and many major analysts do not expect dramatic financial markets’ drops due to Washington D.C. “talks.” So far, markets have largely shrugged off the shutdown as part of business as usual in D.C. However, as we head further down the path of deficit spending and a very likely scenario of increasing our national debt, making portfolio tactical changes to benefit from the momentum of still strong performing “sectors” and “weeding out” the nonperformers is crucial. Warren Buffet said it best on Oct. 16, 2008.
“Be fearful when others are greedy, and be greedy when others are fearful,” he said.
Since Buffet penned his letter, the S&P 500 Index has gained +99.7 percent on a total return basis through 10.4.13 (BTN Research Oct. 7).
2. U.S. citizen perspective … This would be an excellent time to recognize that our government is not a distant, untouchable, incommunicable entity. The government is every one of us. Republicans and Democrats created the problem we currently face. They are politicians. A politician is our representative voted in by us to negotiate for our benefit. They work for us, and we need to exercise our responsibility to communicate to them our dissatisfaction with the job they are doing.
We shared with Allan and Doris that the cookie jar belongs to all of us, and this crisis represents a call for all advisors to offer the one thing many individual investors can’t provide for themselves: an objective, experienced and unemotional perspective, unclouded by fear and based instead upon short- and long-term goals.
The opinions expressed are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.
Allen Ostrofe, MBA, CFP®, AIF® is president of Ostrofe Financial Consultants, Inc., an S.E.C. fee-based registered investment advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a registered investment advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.