Recently, equity markets and media outlets have all been responding to fears of an escalating military situation in Syria. While the impacts of such an event are typically short lived, acts of war can create stress on the markets and wreak short term havoc on commodities markets such as oil and metals. Moving forward, we see a much a greater concern unfolding.
The US Congress came back from recess this week, less than one month away from the beginning of the 2014 fiscal year on October 1st. Before that date, President Obama needs to have his budget approval passed by the House of Representatives and the Senate. The US Senate passed their first budget in 4 years earlier this year in a 50-49 margin, but no agreement has been made between the House and Senate as of yet. Likely, just as they have in years passed, lawmakers will pass a continuing resolution to allow agencies and government entities to continue operating.
On top of the budget concerns, CNN reports that the deadline for raising the debt ceiling could be as early as October 18th. What this means is that (theoretically) the US government will have borrowed all that they can, and will be unable to pay their obligations unless the debt ceiling is raised or unless the federal government can find new sources of revenue.
What all of this boils down to is uncertainty, and if there is one thing that the markets don’t like, it is uncertainty. The purpose here is not to point the blame, if it were we would point the finger at every lawmaker in Washington. The point is that this crisis lends more uncertainty to a point in time when the markets need some definitive answers.
As we have written before, this interest rate environment could spell trouble for the bond market. In just the first 3 weeks of August, bond funds saw an exit of $36.5 billion. Meanwhile, money market funds have begun to dwindle and mutual fund inflows are up slightly, but not enough to show a significant offset of the billions of dollars coming out of bond funds.
Just as Dock David wrote in Localizing Investments, investors have begun to shy away from getting back into equities. This could be due to a number of factors, but our analysis is that there is a perceived risk to investing right now due to international conflicts and the lack of sound fiscal policies coming from Capitol Hill.
Following 2008, investors want nothing but a little bit of security and some sort of confidence when it comes to putting their money back into the markets. Unfortunately, those pushing fiscal policies on a national level have given those investors absolutely nothing to feel confident about.