July 27, 2011
We have spent a fair amount of time fielding questions about the U.S. debt ceiling and the current inability of Congress and the President to reach an agreement about spending and taxes. Virtually no one expects the Treasury to actually default on its debt obligations should the debt ceiling not be raised by the August 2nd deadline outlined by Treasury Secretary Timothy Geithner.
Our own Chief Economist, Greg MacKay, has outlined why we are facing this seemingly dire situation and what some of the consequences could be if the ceiling is not raised prior to 8/2. Mr. MacKay does an equally good job in pointing out that this is largely a political issue and not necessarily a financial one (although he does point out “where the money went” that partially got us into this situation).
One advantage of hiring a Wealth Services Group professional advisor to help with your investment situation is that we bring an average of 20+ years of experience in the investment market to decision-making within your account(s). This experience tells us we have seen many of these issues before.
In fact, the debt ceiling has been raised 74 times since 1962, with 10 of those occurring in the last 10 years. The most recent was November, 2010! While it is hard to ignore the almost constant bombardment of negative news coming from the media, we would urge you to try to do some of that now.
We do not see long-lived, sharp increases in bond yields causing prices to fall precipitously. Nor do we believe stock prices are going to react strongly to a breach in the debt ceiling. The primary reason for this is that we ultimately believe the U.S. has the ability to pay all of its obligations and will eventually show a willingness to do so once the political wrangling is set aside.
Impact on Client Portfolios
As we manage portfolios for our clients, we spend much time talking with you to assess your risk tolerance and determine the appropriate asset allocation to best fit your tolerance. As a result, your portfolio likely has a mix of stocks and bonds that represent a balanced approach to managing this risk.
With our bond investments, we have generally stayed at the shorter end of the maturity schedule and buy only high quality issues that will ultimately pay you periodical interest but return your principal as well. In the event of a downgrade for the U.S., we believe these bond holdings will maintain their value and still pay interest and principal. Having been investors through many previous shocks to our financial, political, and economic systems we know that this belief is well founded in history.
If you have heard comments from the media or your elected officials that disturb you in regard to your investments, please contact your WSG representative and we will gladly give you more insight into how your account is positioned to weather this situation. That is why we have been so successful for so many decades in the past.
Thank you for your business and trust during these volatile times.
This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.