The global economy has been firmly focused on the political situation in the US recently, where Republicans and Democrats have failed to agree how government spending should be appropriated for 2014. While this is having a considerable impact on global markets, we’re currently already taking a relatively cautious position and we’ve consequently left customers’ portfolios unchanged for the time being.
Adding to the debate on spending, the US has a limit on how much debt the government can issue. The limit will be hit on 17th October, unless a new upper ceiling is agreed. Republicans have offered to extend the government’s borrowing authority beyond the deadline, temporarily putting off a default. But in return, they want Obama to further negotiate on the budget dispute that has partially closed the government.
This deadline is exacerbating the issue but may also mean a resolution is reached sooner rather than later. Ultimately, it’s safe to say no US politician wants to appear responsible for putting their economy back in recession, so we’re confident a compromise will be found before the end of the month.
Global ramifications
Assuming the shutdown lasts another week, US growth is likely to be hit by up to 0.3%. Not huge, but still significant. This is obviously having an impact on many markets. Equities have seen a steady decline, down about 4% since mid-September in the US and around 4.5% in the UK.
That said, history tells us there’s no need to panic. In the last shutdown of 1995/96, equity markets initially weakened on the news the government were suspending non-essential services, but then steadily recovered to recoup all its losses.
Also, on the positive side, we have seen a small uplift in bond prices of late.
The much-discussed US tapering
Only a month ago, the financial hot topic was whether or not the US would be reducing its bond-buying programme any time soon.
Even if the political parties resolve the budget issue quickly, economic data will be distorted for October and November so we won’t get a true picture of the state of the US economy until December data is released in January. The president has also confirmed the nomination for Janet Yellen to take over as the head of the Federal Reserve from next January, which also points towards a more gradual move on tapering.
Nutmeg customer portfolios
We suspect that US politicians will probably take this to the brink, but that a solution will be found. Plus, we’re currently already taking a relatively cautious position in our portfolio investments.
As a result, we believe this is a good time to do nothing. What we’re seeing is the normal ebb and flow of markets and how they react to political situations and shifting landscapes. Doing nothing is sometimes very hard but in our opinion this is not the right time to be making big strategic decisions on investment assets, particularly as we’re managing investment portfolios with long-term goals in mind.
About this update: This update was filmed in October 2013 and covers figures for the full month of September unless otherwise stated. Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
Other blogs you might like:
Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port