Looking Past Default, Be An Investor, Not a Trader
Advisors Capital Management
By Charles Lieberman
October 16, 2013
Many investors are focused on whether a budget agreement will be reached before the U.S. defaults on its debt and worry that they should sell out some equity holdings beforehand. In our judgment, this seems to be a far riskier approach than ignoring the entire matter and waiting for some sort of settlement to be reached. Day traders move the markets in reaction to every bit of news, no matter how fleeting, while investors actually have the advantage here. Investors can ignore the noise and volatility and invest for the longer term.
Almost all â€śexpertsâ€ť doubt that the U.S. will be permitted to actually default, even if the politicians are pressing that possibility in their never ending battle to get what they want. An actual default, whereby Treasury debt pays neither interest nor principal when due, will wreck great harm on global capital markets. So while the political battle may be straying too close to the edge of the cliff for comfort, neither side will want to be seen as responsible for allowing default to occur. So we think some way will be found to avoid a real outright default on U.S. government debt.
There are numerous ways to avoid a default, although many of these may be quite unsatisfying to investors. Most simply, the politicians could elect to raise the debt ceiling temporarily, which merely extends the battle beyond the â€śdeadlineâ€ť and allows them to fight on. Or, they could â€ścompromiseâ€ť and accept some interim budget arrangements that renew the battle at a future time down the road. In fact, Washington has been doing this for decades, with past increases in the debt ceiling. Past debt ceiling hikes always set the stage for another budget battle whenever the new, higher debt ceiling was reached. The intensity of each debt ceiling battle that ensued depended on who controlled the White House and the chambers of Congress. The current battle is a bit more intense than in the past, but only marginally so.
So, what are investors to do? Getting out is not a great solution, unless you are a day trader sitting in front of a screen. (Even then, day traders find this too difficult to trade, most simply remain uninvolved.) But day traders are not investors and investors actually have the advantage here. Day traders realize gains and losses by the minute and once each trade is completed, it is in the books and has no bearing on the next trade. In contrast, investors can ignore the short-term volatility and invest for the longer term. If the market falls on lack of a deal, but recovers once a deal is struck, the net effects on the portfolio are minimal. As long as a budget deal is reached and the economy is not destroyed, long-term investors will do fine, especially since the fundamentals supporting the stock market remain quite attractive.
However, investors can inflict great harm on themselves by reacting to the news, if they fail to get out and also get back in at precisely the right time. Being off by a mere 15 seconds on either side of the trade can be very costly. The discussions are taking place behind closed doors, and leaks of progress or failure can occur at any time with no notice and move the market up or down quite sharply. So, it is very easy to get whipsawed by the latest developments. In contrast, being invested and staying the course hurts only if a serious default is allowed to occur. This is possible, but quite unlikely. It may not be easy to look past the daily (or hourly) developments in the talks, since this is the primary news of the moment. But, it is the primary news only of the moment. It will soon be old news. So, either buy on dips after a report of no progress on a deal, or turn off the TV entirely. (I donâ€™t have the option of turning on the TV to watch my NY Football Giants, whose season has already gone up in smoke just six games into the season.) The politicians are playing their normal games and when they must, a deal will be struck. Thatâ€™s a reasonable bet and one worth investing for.
(c) Advisors Capital Management