After almost a month of wrangling, U.S. stock markets reacted positively to news that a fiscal deal between Democrats and Republicans in Washington was agreed on thereby averting a default on our country's debt and reopening non-essential government departments. Had the U.S. defaulted on its debt, a repeat of S&P500 July-August, 2011 17% drop, or worse might have occurred. While this would have been unwelcome by most investors, it would likely have been only a bump in the road with valuations recovering as things returned to "normal". However, the U.S. federal government cannot continue to kick the can down the road indefinitely without negative consequences for most of us. Fiscal irresponsibility, by individuals, households, and yes, even governments carries a price. Negotiating terms that will allow longer term progress in reducing entitlement expenses and improving our inefficient tax code, and right sizing other important government budget items will not be easy and require leadership.
What does this mean regarding our constructive outlook for investments? In the near term we retain our conviction that equities remain reasonably priced for a slow growth economy and bonds offer more downside than upside as the Federal Reserve's stimulus can't last forever. As such, we continue to examine fundamentals (earnings, liquidity, leverage, and cash flow relative to price) and are maintaining broadly diversified portfolios. Our expectations for stock and bond market returns are modest and negligible, respectively over the near term. Balanced portfolios, in our view, continue to stand a high likelihood of beating inflation and allowing our clients to make progress on their long term financial goals.
Andrew M. Aran, CFA
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Mark D. Reitsma, CFP®, CMFC
Timothy G. Parker, CFA