Whether you like it or not, the movements coming out of Capitol Hill affect Wall Street, and that makes it difficult for the average investor.
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Take for example the 11th hour – or the 11th hour and 30 minutes – move Congress made in October that ended the government shutdown and avoided a potential default on U.S. debt. The move certainly resonated well on Wall Street with the S&P 500 hitting new highs and pushing the NASDAQ Composite to levels not seen since 2000.
But don’t breathe a big sigh of relief just yet - more turmoil is looming on Capitol Hill that could move the markets and impact your investments.
New Year, Same Old Song
The debt deal agreed upon on Oct. 16 funds the government through early January and raises the debt ceiling to a level that will probably need to be renewed again in February. Yes, that means the next round of negotiation will come just after the holiday season.
There are a range of opinions on whether the next round of political fighting will be as contentious as it was during the 16-day shutdown.
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On one hand, political commentators point out that Republican lawmakers might be more willing to negotiate this time around after the reputation and political damage from October’s debates.
But on the flip-side, not much was resolved by the Oct. 16 agreement, and it’s hard to see much changing in the political posturing. So what may happen in 2014 is really anybody’s guess. Markets despise uncertainty, and that uncertainty could threaten to bring current asset values down from their record high levels.
Watch the Fed
Before the shutdown/debt ceiling melee moved center stage, the Fed surprised Wall Street by backing off from what seemed like its earlier intention of starting to reduce its quantitative easing (QE) program in October as the bank worried about the strength of the economy.
With the threat of a January/February impasse still in the air, a market consensus appears to be forming that the initial tapering of the bond-buying program may be further down the road than first thought. That could be good for asset markets, which have grown addicted to this monthly infusion of $85 billion from the central bank.
But keep in mind the move could also backfire. QE has to end one of these days, and the farther down the road the can gets kicked, the harder it will be to break the habit.
Advice for the Long Term Investor
The current cloud of uncertainty makes it tough for an investor, and very often the best thing to do is simply nothing.
Timing the market correctly is extremely hard, and getting in and out of the market at the right time is not a game that individual investors with a long-term horizon should succumb to. If your asset allocation has been properly structured to match both your ability to absorb risk and your tolerance towards risk, then you are better off staying in the markets for the long haul.
Not doing anything doesn’t mean that you should be totally passive. It’s essential to ensure on an ongoing basis that your portfolio has the appropriate level of risk for your circumstances and preferences, and you should be rebalancing at least quarterly to keep your asset allocation on track.
And so the battles in Washington will come and go, and hopefully Armageddon will be averted once more in the new year. But just as that crisis is avoided, who knows what other crisis might be looming? In the wake of this month’s tricks and treats and those that may lay ahead, investors should stick with their strategy and remain focused on the long term.
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