The US Senate passed H.R. 2775 –Continuing Appropriation Act, 2014 Wednesday afternoon 81 votes to 18. The House of Representatives passed the bill around 10PM Wednesday night 285 to 144, and the bill was signed into law by President Obama at 12:30 AM Thursday morning. 100% of Democratic Representatives voted for the bill, but only 37% of Republican Representatives in what is widely regarded as a disastrous outcome for the Republican strategy of shutting down the government in order to “defund ObamaCare.” In summary, the bill allows the US Federal Government to keep functioning at budget levels established in last year’s appropriations bills, raises the debt ceiling through February 7th, and adds a modest income verification component to the Affordable Care Act.
It is important to understand that raising the debt ceiling does NOT authorize future spending, but rather permits the US Treasury to borrow money for to pay for expenses already incurred; for example, commitments to Social Security and Medicare, and for the $1.2 trillion spent on the wars in Afghanistan, Iraq and the “Global War on Terror.”
|
President |
As of |
US Debt ($ trillion) |
|
William Clinton |
12/31/2000 |
$5.7 |
|
George Bush |
12/31/2008 |
$10.7 |
|
Barrack Obama |
12/31/2012 |
$16.4 |
|
Barrack Obama |
10/16/2013 |
$16.7 |
What was the impact of the 16 day shutdown? Preliminary estimates from Standard & Poor’s indicate that 4th quarter GDP will be reduced from 3.0% to closer to 2%, so that’s about $24 billion in economic production that didn’t occur. As a result, the US Treasury will receive billions less in tax revenues, which doesn’t help the deficit. The 800,000 furloughed Federal workers WILL get back pay, but the businesses that depend on those workers will NOT get back those revenues. As recently as October 3rd, retailers were optimistic about the 2013 Holiday season with expectations of 3.9% gains in sales. We wonder how eagerly Federal workers will want to spend in the 4th quarter if they fear repeating this process all over again in January.
Meanwhile, in earnings news (the true driver of stock market performance when investors aren’t mesmerized by politics), Q3 2013 reports are coming in pretty much expected. Overall earnings growth is depressed at 0.9% year over year. Comparisons year over year were easy when companies rebounded from the 2009 recession. 2012 was a relatively strong year for revenues and earnings, so continued growth depends on robust economic conditions, which we have not seen over the last year.
Despite all this, the S&P 500 is flirting with record levels. How is this possible? Though earnings growth over the last year is negligible, earnings growth going forward looks positive IF shenanigans in Washington don’t destroy business and consumer confidence. It seems unlikely that interest rates will rise now until June 2014, which supports the current valuation of the S&P 500. Lastly, there’s not much else to invest in right now which looks attractive, yet billions and billions of dollars remain invested in cash.
We made the right call earlier this week to keep our clients invested, and as a result their portfolios remain at or near records levels. After a cooling off period, Republicans and Democrats must work in a bipartisan fashion to create a realistic Federal budget that curtails growth in the national debt WITHOUT crushing the still feeble recovery, costing hundreds of thousands of American jobs.
© Heron Financial Group
