As expected, lawmakers in Washington took us to the brink but not beyond, ending their standoff Tuesday night in last-minute votes to approve a plan negotiated by Senate leaders from both parties. President Obama signed the bill, which suspends the debt limit through February 7 and funds the government through January 15, shortly after midnight on the day the debt limit was expected to be reached. Default was averted, and the government re-opened.
While the immediate crisis was avoided, there was no resolution to the ongoing fiscal issues around the deficit and spending. Those will wait for another day, as has become habit. The bill that passed was for spending at the 2011 level, and it included a directive to the House and Senate to negotiate a new long-term budget accord by December 13. Standard & Poor’s estimates that the shutdown will cost the economy $24 billion and will cut .6% from fourth quarter GDP.1
As we suggested in a previous letter, the markets seem to have anticipated the result. On Wednesday, when it became clear that a deal was in the works, the S&P 500 shot up to close out the day with a 1.4% gain. We didn’t need the uncertainty and worry, but it turned out to be another example of why we are better off not letting political events intrude on our long-term investment plans.
Sometimes the value of staying the course and maintaining market exposure only becomes apparent over long time periods. Here was a case where it hit you in the face very fast—over the 16 days of the shutdown, the S&P 500 was up 2.4%. That’s a number you might expect for a full quarter’s return, not the kind of result fear mongers and market timers like to hear. Yesterday, the index hit all-time highs. That’s not to say it will keep going up from here. It may or it may not. And we’ll see what the next budget and debt deadlines bring.
While our politicians have apparently decided that management by crisis is the way to go, you don’t have to do the same with your portfolio. A good lesson, reinforced by the latest round in Washington.