After all of late summer’s anxiety and angst surrounding the debt ceiling debate and Congress’ last minute deal in raising the ceiling, many are wondering how the deal may impact them and what they should do next.
What’s the deal? The Budget Control Act of 2011 is a two-part agreement increasing the debt limit while also reducing spending:
• Debt Limit: There was an immediate increase of $400 billion in the debt ceiling, with an additional $500 billion increase through February 2012, both part of the first installment. The second installment will raise the ceiling an additional $1.2 to $1.5 trillion, depending on the deficit reduction plan.
• Deficit Reduction: Spending caps will reduce the deficit by $917 billion over 10 years with $21 billion applied to the 2012 budget. A new 12-member bipartisan Congressional committee must recommend a deficit reduction proposal by Thanksgiving, 2011. The proposal is mandated to cut at least $1.5 trillion over the coming 10 years. The House and Senate have until December 23, 2011 to approve the committee’s proposal. If Congress fails to pass at least $1.2 trillion in cuts, Congress can increase the debt ceiling by that amount, but that action will automatically trigger cuts across various security programs, such as Defense and Medicaid.
In the end, will the deal in Washington reduce the debt? Not exactly. The deficit reduction deal will slow the growth rate of U.S. debt by reducing annual spending increases from current estimates. It’s a start, but Congress still has a lot to do. Tough choices need to be made about taxing and spending, which could prove difficult during a still-weak economy and the lead-in to the 2012 election season.
What’s the impact? One early impact of the delayed decision in Washington was Standard & Poor’s downgrading of its U.S. debt rating from AAA to AA+, a decision that appeared to be based largely on pessimism in our government’s ability to stabilize the debt dynamics (notwithstanding the S&P’s $2 trillion calculation error). In fact, later in the month—after the initial negative media and market response—both Moody and Fitch affirmed their AAA ratings. No one knows the long-term impact of S&P’s downgrade.
Another more immediate impact was the rollercoaster ride the stock market took in August. The DJIA started the month at 12,132, but by August 29 hit 11,539, with many hundred point swing days in between. Given the increase in the market since it’s March 2009 low, a correction wasn’t completely unexpected.
What should you do? As for what investors should do, a lot depends on how individuals felt this month. Are you one who frequently checked account values, had a terrible feeling in the pit in your stomach about what was happening, or lost sleep worrying about what tomorrow’s market would bring? If so, this is a good time to sit down with your Family CFO and revisit your risk tolerance and time horizon and review your asset allocation, including adding alternative investments if appropriate (please see Chris Jordan’s discussion at ___________________).
However, if you had the ‘been-there-done-that’ feeling of having weathered the 2008 storm or even a more positive outlook that this latest volatility was an expected correction, an historical part of a market cycle, then your asset allocation is probably where it needs to be, in line with your risk tolerance and time horizon. Our recommendation is that investors stick with their agreed-upon asset allocation, work with their Family CFO to rebalance accounts as they shift out of line with their asset allocation and consider adding alternative investments if appropriate.
Whatever the best decision for each individual, if this rollercoaster stock market ride continues, it’s prudent to fasten your seatbelt, keep emotions in check, and remain disciplined to your investment strategy. With so many unknown factors that may result from the Washington upheaval over the debt limit and spending reduction, and the resulting downgrade of U.S. debt, the wisest strategy is to have one, revisit it as needed, and stick with it. Anxiety and angst are never good places from which to evaluate your position. Your Moneta Family CFO can help you take the emotion out of important financial decisions.
