Let’s make a deal

Last week began on an uncertain footing. What was once thought of as unthinkable suddenly became thinkable; a cool fall wind drifted through the market. A general consensus that politicians would hit the brakes at the last minute and avoid going over the debt-ceiling cliff seemed to shift in the direction of how the U.S. Treasury might manage a breach of the debt ceiling.  Like any game of chicken, the question becomes – who might blink first? A couple of triple-digit losses in the Dow at the start of the week seemed to suggest of bit of angst might be setting in.

On Wednesday, we received some relief, as the expected became official – Vice Chair Janet Yellen was nominated by the president to lead the Federal Reserve when Chairman Bernanke’s term expires at the end of the year.  Janet Yellen has a wealth of experience. She led the president’s Council of Economic Advisors from 1997 – 1999, served as president of the influential San Francisco Federal Reserve between 2004 – 2010, and as vice chair of the Fed from 2010 through the present (Wall Street Journal).  She must be confirmed by the Senate, but barring something unforeseen, she will be the next Fed chief.

Important? You bet! Yellen is considered to be more dovish than Bernanke, which means it is more likely that she will work to hold interest rates low for a longer period of time in order to spark faster economic activity.

The markets rallied strongly last Thursday, when the Republican leadership in the House proposed to raise the debt ceiling for about six weeks in return for talks aimed at reducing the federal deficit. By week’s end, the president had rejected a short-term extension, arguing for a longer-term solution (Wall Street Journal).  The retracement in shares occurred amid optimism that a deal will get done. Even if it is only a short-term deal, it alleviates the anxieties that had been building that Congress and the president might fail to raise the debt ceiling. Although we could end up revisiting the same issue in a few weeks, it injects some level of certainty into the overall equation.  When the week came to a close, the Dow was able to erase losses experienced early in the week and closed above its pre-government shutdown level. Talks had also expanded to include a re-opening of government agencies that are still closed.

Looking ahead

Baseball legend Casey Stengel once said, “Never make predictions, especially about the future.” Still, stocks are trying to price in an agreement that raises the debt ceiling, and odds favor some type of deal.

However, the yield on the 4-week T-bill has jumped from 0.03% on Sep. 30 to 0.27% as of Oct. 8 and dipped only 0.02 percentage points by Oct. 11 (U.S. Treasury Dept.), suggesting that while the stock market is more optimistic, the more conservative bond market is looking for something concrete.  As we approach the Treasury’s Oct. 17th deadline, we may see renewed volatility amid the wrangling by both sides. If the deadline were to pass without an agreement, uncertainty would likely increase.  The next few days should be interesting.  We remained under weight in stocks at this time for all risk levels, and do still expect some type of market correction in the future, even though, so far, stocks have been unusually stable during the past two weeks.  We will keep you posted.

Who does the Government owe?

The following chart provides a breakdown of the overall U.S. Government debt and creditors by category and shows the largest creditors.


Source: NPR

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God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.


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