As part of the agreement this past August to increase the debt ceiling, a congressional “super committee” was formed with the task of finding at least $1.2 trillion to cut from federal spending. If the committee could not come to an agreement about these cuts by November 23rd, a series of automatic cuts would go into effect in 2013. These cuts will be roughly split between defense and non-defense spending. As of the writing of this post, it is expected that the super committee will soon be announcing their failure to reach a compromise on budget cuts.
Like most instances of political uncertainty and instability, it would not be uncommon for a failure by the super committee to cause a spike in volatility in the short-term. We saw a significant market downturn in the weeks after the budget and debt debates this summer, but a substantial portion of those losses were quickly recovered when stocks bounced back up. It is possible that we will see a return to this higher volatility over the next few weeks, but we do not recommend altering your investment strategy in light of these issues.
There are three major issues that make this situation different from the debates we saw over the summer.
- If the summer debt debates taught us anything, it’s that we should not have high expectations that Congress will learn to compromise. Because of this lack of bi-partisanship, expectations for a successful resolution had already been low and most analysts believe the stock market had already priced in a super committee failure.
- When the debates were at their peak in August, the major consequence of failure would have been the U.S. defaulting on its debt. With the current situation this is not the case. This is not a debate about whether or not to pay our bills – it’s about how to cut our spending. The super committee’s job is to try and agree upon categories of spending that can be reduced or eliminated going forward.
- The $1.2 trillion in automatic cuts are not scheduled to take effect until 2013, so it is not as if changes will be happening overnight. This time delay also gives Congress the ability to modify the law during the next year – making those “automatic” cuts, a little less definite.
If you have questions about the current budget situation and how it may impact your investment strategy, please feel free to contact a member of our adviser team at 877.627.8401.
Joe McCulloch
Senior Investment Adviser
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