While the government shutdown enters Day 10 and the debt limit deadline (October 17) fast approaches, it’s easy to get caught up in the daily news updates and posturing. Reports out of Washington this morning give some reason to hope that the standoff may end soon. House Republicans are meeting about a short-term measure to raise the debt ceiling in advance of a meeting between GOP leadership and the White House later today.
While we advocate staying with your long-term investment strategy through times of uncertainty like this, there are market participants who are able to take advantage of dislocations at such times. Because money market funds must maintain a $1/unit price, we hear the news that Fidelity, the country’s largest manager of money market funds, has sold out of all US debt due within the next month or so. It’s a prudent thing to do for a fund that can’t afford the possibility, however unlikely, of having to mark down government debt if payment is not made. Bill Gross over at PIMCO is on the other side of that trade, scooping up the debt and taking advantage of yields not seen since the financial crisis in 2008. PIMCO is not constrained like a money market fund is and sees the chances of default as 1 in a million.1
The bottom line is that the odds of a default are very low. A worst-case scenario involves more managing the timing and priority of payments than the actual ability to pay.
However, there is reason for concern that the shutdown, if it goes on for several weeks, will impact economic growth and corporate performance, which could lead to weaker stock prices in the weeks ahead. Key voices in the House and Senate are discussing the big items like entitlement and tax reform and thoughtful cuts in discretionary spending. While getting agreement on these issues will take time, the president opened up the possibility of a short-term (several weeks) end of the shutdown and a debt ceiling increase to give Congressional negotiators time to cut a deal on these big points, which could finally bring some sense of stability to the federal budget and in turn should help promote future economic stability. So out of this embarrassing morass, our policy makers may very well end up stumbling their way towards critically important long-term solutions.
It is always treacherous to try to adjust one’s investment plan based on policy fights, and we believe this time is no different. The country and the markets will get through this. Keep on plan. Stay disciplined.