Of Chickens and Debt Ceilings

Wealth Management

By Nancy Skeans

Bloomberg Business CoverSeveral months ago, I taped a picture of a chicken on my office door. Yes, I have gotten a few strange looks. Across the bird is scrawled “Don’t Play Chicken with the Debt Ceiling.” The picture was taken from the April 18th cover of Bloomberg Businessweek. The article discussed why it was not a good idea for Congress to hold the debt ceiling as hostage to their political maneuverings. Perhaps instead of taping the chicken to my door, I should have sent copies of the magazine to Congress for distribution. Obviously, they missed the issue and the point! Here we are, almost four months later and we have no resolution to the debt ceiling. We do have a lot of political rhetoric. In my mind, Congress has gone from playing chicken to something much more serious….they are now playing hot potato with a live grenade. I do hope they don’t blow their fingers off. Well, if that is the worst thing that happens, a few missing fingers might be a teaching moment.

Okay, sorry for the lengthy introduction, but I felt compelled to write it. In the last few days, we in Wealth Management have had several inquires about the impact of the most recent “crisis” on the equity and bond markets. Rest assured, as of the time of this writing, we are not seeing a panic in the markets. We are seeing uncertainty. Admittedly, there is always some uncertainty in the securities markets. One can’t predict what is going to come down the road tomorrow, but in general, investors can use corporate earnings, inflation, interest rates, economic growth and other data points to form an opinion on the value of an investment. Real uncertainty arises when an event occurs that is completely unexpected, such as the Japanese earthquake or when the outcome of an event is really an unknown such as the outcome if Greece is allowed to completely default on their debt.

The uncertainty we are seeing in the market today is a direct result of the unknown that Congress is creating by failing to take action on the debt ceiling. What will happen if it is not raised in time? Markets do not like uncertainty. Some investors will move to safety and take a lower price for their assets in order to do so which pushes security prices down. This does not mean that the equity or bond is really worth less in the long run, but today the price is based only upon uncertainty.

Fear is the real enemy of investors. Fear can cause individuals to make decisions in the moment. In a few weeks this issue will be behind us, but the damage that an investor can do to their portfolio by running for cover in the middle of the “uncertain” period may not be something that is easily repaired.

Our advice is always: (1) do not invest cash in the equity market that you need to spend in the next few years, (2) always use a diversified approach to your investment strategy both for bonds and equities, and (3) don’t let the media drive your investment decisions.

P.S. Please feel free to call, email or write your Congress members and let them know how you feel about their irresponsible and potentially dangerous behavior.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person any tax-related matter.

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