#longterminvesting

On September 30, 2021, Congress averted a potential federal government shutdown by passing a last-minute bill to fund government operations through December 3, 2021. Two weeks later, another measure raised the debt ceiling by just enough to sustain federal borrowing until about the same date. Although these bills provided temporary relief, they did not resolve the fundamental issues, and Congress will have to act again by December 3^rd.

Spending vs. Borrowing

The budget and the debt ceiling are often considered together by Congress, but they are separate fiscal issues. The budget authorizes future spending, while the debt ceiling is a statutory limit on federal borrowing necessary to fund already authorized spending. Thus, increasing the debt ceiling does not increase government spending. But it does allow borrowing to meet increased spending authorized by Congress.

The underlying fact in this relationship between the budget and the debt ceiling is that the U.S. government runs on a deficit and has done so every year since 2002.¹ The U.S. Treasury funds the deficit by borrowing through securities such as Treasury notes, bills, and bonds. When the debt ceiling is reached, the Treasury can no longer issue securities that would put the government above the limit.

Twelve Appropriations Bills

The federal fiscal year begins on October 1, and 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.² These appropriations for discretionary spending account for about one-third of federal spending, with the other two-thirds, including Social Security and Medicare, prescribed by law.

Though it would be better for federal agencies to know their operating budgets at the beginning of the fiscal year, the deadline to pass all 12 bills has not been met since fiscal year 1997.³

In order to buy time for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date based on a fixed formula. The September 30^th resolution extended spending to December 3 at fiscal year 2021 levels. Adding to the stakes of this year’s budget negotiations, spending caps on discretionary spending that were enacted in 2011 expired on September 30, 2021, so fiscal year 2022 budget levels may become the baseline for future spending.⁴

Raising the Ceiling

A debt limit was first established in 1917 to facilitate government borrowing during World War I. Since then, the limit has been raised or suspended almost 100 times, often with little or no conflict. However, in recent years, it has become more contentious. In 2011, negotiations came so close to the edge that Standard & Poor’s downgraded the U.S. government credit rating.

A two-year suspension expired on August 1 of this year. At that time, the federal debt was about $28.4 trillion, with large recent increases due to the $3 trillion pandemic stimulus passed with bipartisan support in 2020, as well as the 2021 American Rescue Plan and continuing effects of the Tax Cuts and Jobs Act of 2017.⁵ The Treasury funded operations after August 1 by employing certain “extraordinary measures” to maintain cash flow. Treasury Secretary Janet Yellen projected that these measures would be exhausted by October 18.

The bill signed on October 14 increased the debt ceiling by $480 billion, the amount the Treasury estimated would be necessary to pay government obligations through December 3, again using extraordinary measures. Unlike the budget extension, which is a hard deadline, the debt ceiling date is an estimate, and the Treasury may have a little breathing room.

Potential Consequences

If the budget appropriations bills — or another continuing resolution — are not passed by December 3, the government will be forced to shut down unfunded operations, with the exception of some essential services. This occurred in fiscal years 2013, 2018, and 2019, with shutdowns lasting 16 days, 3 days, and 35 days, respectively. A Senate report estimated that the three shutdowns cost taxpayers almost $4 billion and nearly 57,000 years of lost production time.⁶

Although the consequences of a government shutdown would be serious, the economy has bounced back from previous shutdowns. By contrast, a U.S. government default would be unprecedented and could result in unpaid bills, higher interest rates, and a loss of faith in U.S. Treasury securities that would reverberate throughout the global economy. The Federal Reserve has a contingency plan that might mitigate the effects of a short-term default, but Fed Chair Jerome Powell has emphasized that the Fed could not “shield the financial markets, and the economy, and the American people from the consequences of default.”

Given the stakes, it is unlikely that Congress will allow the government to default, but the road to raising the debt ceiling is unclear. The temporary measure was passed through a bipartisan agreement to suspend the Senate filibuster rule, which effectively requires 60 votes to move most legislation forward. However, this was a one-time exception and may not be available again. Another possibility may be to attach a provision to the education, healthcare, and climate package slated to move through a complex budget reconciliation process that allows a bill to bypass the Senate filibuster. However, the reconciliation process is time-consuming, and it is not clear whether the debt ceiling would meet parliamentary requirements.

The budget and the debt ceiling are serious issues, but Congress has always found a way to resolve them in the past. It’s generally wise to maintain a long-term investment strategy based on your goals, time frame, and risk tolerance, rather than overreacting to political conflict and any resulting market volatility.

Sources:

1. U.S. Office of Management and Budget, 2021
2. Committee for a Responsible Federal Budget, June 25, 2021
3. Peter G. Peterson Foundation, October 1, 2021
4. Committee for a Responsible Federal Budget, October 18, 2021
5. U.S. Treasury, 2021 and Moody’s Analytics, September 21, 2021
6. U.S. Senate, September 17, 2019

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

We sit here today, reflecting on the recent bull market in stocks, bonds, and housing. The Federal Reserve Chairman, Jerome Powell, gave a dovish speech last week and didn’t give a timetable “to take away the punch bowl” and the bull market party continues. 

As the ex-Citigroup CEO, Chuck Prince, stated, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” But we prefer the Deep Thought by Jack Handey, “Let’s be honest: Isn’t a lot of what we call tap dancing really just nerves.”

While I dance with my nerves, I know by following time-tested investment strategies, keeping my emotions in check, and by having a long-term plan, the likelihood of positive returns grows even if there is a forthcoming market decline. By succumbing to short-term strategies such as market timing or performance chasing, many investors show a lack of knowledge and/or ability to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons.

This lack of discipline has cost the average investor many thousands (sometimes hundreds of thousands) of dollars over a lifetime compared to other asset classes over the last 20 years, according to Dalbar Inc. (See Chart) According to Reuters, the average holding period for U.S. stocks today is around 5 ½ months. No wonder why the average investor is their own worst enemy.

Even the average homeowner gets the importance of time in the market rather than timing the market. Most homeowners tend to stay in place for at least eight years, according to DataTrek (*note – the illiquid nature of homeownership and tax benefits partly explain the longer holding period). The average eight-year period compound annual growth rate (CAGR) for a homeowner is 3.7% – note this is higher than the average investor return of 2.9%.

Author Carl Richards states, “We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’s not rational.” Market timing easily plays on our emotions in a way that overrides even the most well thought out plans. But if you stay calm, you’ll find that the likelihood of a positive return grows higher the longer you stay invested. Having a long-term plan, one that can work through market volatility, is one of the best ways to pursue your long term goals and bolster your financial situation for years to come.

If you don’t have a long-term plan or are feeling nervous about the markets, we recommend you first start by determining how much risk you are willing to accept. Take our free risk analysis. From there we can continue the conversation in helping you create a long-term plan.

1. Indices used are as follows: REITs: NAREIT Equity REIT Index, Small Cap: Russell 2000, EM Equity: MSCI EM, DM Equity: MSCI EAFE, Commodity: Bloomberg Commodity Index, High Yield: Bloomberg Barclays Global HY Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Cash: Bloomberg Barclays 1-3m Treasury, Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.