Maintaining Perspective: Market Reactions in the Wake of the Debt Ceiling Vote

Maintaining Perspective: Market Reactions in the Wake of the Debt Ceiling Vote

Presented by James A. Weiss, AAMS, RLP & Laurence N. Hale, AAMS, CRPS

As you know, there was much speculation about how the stock market would react to this week’s debt ceiling vote. The sharp market downturn on the heels of Tuesday’s decisionhas prompted some commentators to issue bold and sweeping pronouncements about the state of the economy.“Policy of the last two years has failed,” writes Paul Krugman in the New York Times.“We never fixed the underlying structural problems in the U.S.,”says Steven Pearlstein in the Washington Post.

Given the strength we have seen in the economy over the past two years, however, we believe a more appropriate response to today’s market situation can be found in a headline fromThe Motley Fool: “Panic and sell? No way!”

Filtering the noise

The reality is that the stock market has taken a breather, easing into what market commentators call a correction—a move lower by at least 10 percent from a recent high. Thursday August 4’s drop accounted for almost half of the market’s recent losses, with the Dow losing 512 points, or –4.31 percent, and the S&P 500 losing60.27 points, or –4.78 percent.

What should investors make of this situation? First off, it’s wise not to overreact. A look at the U.S. bond market shows that the Barclays Capital Aggregate Bond Index actually had a positive 0.46-percent return on Thursday.While this isn’t enough to offset the stock market losses, it certainly can help to dampen volatility in a well-diversified portfolio.

That aside, the stock market’s reaction to the resolution of the debt ceiling negotiations is certainly disconcerting. Many thought that the markets would look favorably on the decision to raise the debt ceiling, averting a possible credit downgrade or outright default. But instead of celebrating the end of the crisis in Washington, the markets have instead declined on the theme of weak economic growth.

In the U.S., growth has been “muddling along,” to quote Bill Gross, chief investment officerof PIMCO. For the second quarter, GDP growthwas reported at just 1.30 percent annualized, lower than long-term averages and economists’ expectations. But there’s also reason to be optimistic: the latest employment figures show that the U.S. added 117,000 jobs in July. In addition, corporate earnings continue to be strong. In fact,72 percent of companies reporting for the second quarter beat Wall Street’s earnings estimates, and future estimates continue to suggest strong company fundamentals.

Perspective before action

When will the economy recover, and what should investors do in the meantime? No one can say with any certainty when the recovery will begin to take hold. We do know that the impulse to sell when markets are low generally isn’t a sound investment strategy. Now may not be the best time to consider reactionary selling considering that, as of Thursday’s close, the S&P 500 wasoff its high for the year by 11.51 percent. As Dave Kansas of the Wall Street Journal writes, “Investors shouldn’t let fear guide their decisions.”

Since the dramatic bear market selloff in 2008, many investors who have maintained market exposure in well-diversified portfolios have seen their holdings rebound.On the other hand, investors who panicked may have seen mixed results, perhapsmissing some of the dramatic market recovery of 2009 and 2010. In the current environment, it may well be wise to follow a maxim of Warrant Buffett’s: “Be fearful when others are greedy, and greedy when others are fearful.”

There’s no crystal ball

Although no one can predict what the markets will do in the near-term, we do know that they have shown a propensity to rise and fall over time. Market volatility reminds us that being a disciplined investor isn’t always easy. In situations like these, the best advice is to maintain focus on your long-term goals and objectives. Historically, many successful investors have tended to be those who diversify, look past short-term volatility, and remain true to their investment plans.We believe this will continue to be the case.

Sources:Bloomberg

Disclosure:Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index.The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.

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Submitted by: James A. Weiss and Laurence N. Hale are financial advisers practicing at Weiss & Hale Financial, LLC, 697 Pomfret Street, Pomfret Center, CT 06259. Jim and Laurence offer securities and advisory services as investment adviser representatives of Commonwealth Financial Network®, a member firm of FINRA/SIPC, a Registered Investment Adviser. Jim and Laurence can be reached at 860-928-2341 or via email at: or . Visit for further information. Plan Well. Invest Well. Live Well.™

Authored by Simon Heslop, CFA®, director of asset management, and Sean Fullerton, investment research associate, at Commonwealth Financial Network.