You may have noticed that markets have been especially volatile in the last few weeks. The S&P 500 dropped 4.5% from its August peak, while the Dow lost 5.4%. Since then, markets have regained their footing and are heading towards historic highs again. However, as we move into fall, many experts believe we’ll face a period of high volatility as markets grapple with some major events. Let’s address a few of them.
1. The Syrian crisis
Earlier this month, President Obama asked Congress to approve limited military action against Syria after government forces allegedly used chemical weapons against civilian targets. While a diplomatic solution has been negotiated between the U.S. and Russia, much remains to be decided and a military option may still be on the table. The major worry for investors would be if the situation escalates and the U.S. gets embroiled in a prolonged conflict.
2. A New Federal Reserve Chairman
Current Fed Chairman, Ben Bernanke, will step down from his position in January and his replacement will be named soon. Rumors about President Obama’s nomination are flying and we can expect a contentious confirmation process by the Senate, filled with horse-trading and negotiations. The new Fed chairman will have the responsibility of managing the tapering process and ending the Fed’s unprecedented quantitative easing programs while keeping the economy on track.
3. Federal Reserve Tapering
The Fed has been telegraphing for months that a reduction in the pace of its $85 billion of monthly bond purchases is coming. Whether tapering really gets going in September, October or December, it’s unlikely to be a smooth process. More probably, the Fed will taper, see how it goes, and taper again in fits and starts.
Coming out of the Great Recession, the Fed pulled out all the stops to boost economic growth, which resulted in over $3.5 trillion in bond purchases. Now that the economy is chugging along, the Fed needs to pull back on its purchases and start unloading those bonds. Investors worry that cutting back on quantitative easing may cause the economy to stall and markets to decline. While much of the uncertainty is already priced in, markets could react nervously at any unexpected surprises.
4. The Federal Debt Ceiling Debates
Markets will also have to face up to the challenge represented by the debt ceiling crisis, which will rear its ugly head again when the U.S. reaches its debt limit again in October. To give you a quick refresher, the U.S. reached its debt ceiling, a limit set by Congress on the amount that the government can borrow for public spending, on December 31, 2012 (this formed part of the fiscal cliff.) Since then, Congress has repeatedly declined to resolve the situation and raise the debt limit. One of the consequences of this failure was the sequester, $1.2 trillion mandatory, across-the-board federal budget cuts, which went into effect on March 1.
Well, we’re back where we started, but with many fewer options. Congress has to come to an agreement before October, or risk defaulting on U.S. debt obligations. These debates are a big deal because the U.S. has a serious debt problem – our national debt is now over 100 percent of GDP – and this has major ramifications for the long-term health of the U.S. economy.
As part of the debt ceiling debates Congress has to decide on the future of U.S. fiscal policy and come up with a way to reduce public debt. We expect these debates to be contentious and may roil markets.
It’s impossible to predict which way markets will move with any certainty, and we always recommend maintaining focus on long-term objectives instead of short-term market gyrations. While we can expect more volatility this year, it’s important to remember that volatility often presents opportunities for flexible investors and we work hard to find those opportunities for our clients.
If you have any questions about the information we’ve presented or want to know how these challenges may affect your investments, please let us know; we would be happy to discuss your concerns. As always, it is our sincere pleasure to be of service.