Now that our elected officials in Washington have come to a short-term budget agreement, what can we expect in the markets and economy for the near term? Unfortunately, probably much of the same:
- Addicted to the Fed. Many economists believe that a major reason why the Fed did not reduce or taper its bond purchases this past September was because of the federal budget issues that needed to be addressed in October. The Fed is aware of how dysfunctional and crisis-creating our government has become and didn't want to further stress the markets during that period of time. However, easy money Fed policies may have become an addiction for the economy rather than a cure. They have to end sometime and the impact of their withdrawal becomes more severe the longer they continue. Unfortunately the debt ceiling was only raised until early February of next year. Expect the Fed to continue easy money policies while budget battles reign.
- Market volatility. The U.S. equity markets do not appreciate uncertainty. With a debt ceiling crisis scheduled to re-appear again in February, expect the U.S. equity markets to fluctuate significantly when it first appears that an agreement may be possible, and then plunge as the agreement slips away. Repeat numerous times.
- Low interest rates. While good for the stock market, many economists now question whether Fed policy is standing in the way of further economic growth. Easy money could be hurting the economy more than helping. With Janet Yellen coming on board as the new Federal Reserve Board Chair, her stated commitment is more of the same medicine rather than a change in policy. Expect interest rates to remain low.
- Uncertainty. Business is not a friend of uncertainty either. What will Obamacare mean for the economy and American businesses? Will the next debt ceiling crisis be worse than the last? When will the Fed begin to take its foot off the gas pedal? Will the Yellen Fed perform as advertised? Most of the uncertainty that exists in the economy today has been manufactured by what many see as a less than competent federal government.
- Stubbornly high unemployment. American business is not eager to expand unless it believes it has a reasonable chance to succeed. The amount of uncertainty that is being pushed into 2014 does not appear to create an environment that encourages risk-taking and growth. As a result, new hiring is likely to remain tepid.
Our federal government has become adept at kicking the can down the road to avoid making the hard decisions. Kopin Tan may have said it best recently in Barron’s when he asked how we would feel about Apple if they shut down for a few weeks because they were squabbling about the iPhone 7?
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at email@example.com or 414.828.4015.
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