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Don't Let Debt Debates Derail Your Investment Strategy
Why you shouldn't let political uncertainty dictate your financial future. Reviewing the debt debates that are taking center stage.
But markets have rarely paid attention to U.S. debts or deficits over time. While raising the debt ceiling again could provoke controversy, we don’t think it will disrupt the positive fundamental trends of economic growth and rising earnings. So when debt debates take center stage, don’t let them derail you from working toward your financial goals.
Deficit vs. Debt
The federal budget deficit – the gap between federal spending and revenue – has returned to less than 3% of GDP. That’s near its average since 1950 and not a short-term concern for the economy or markets. Unlike individuals, governments can continue to run budget deficits for many years by issuing bonds.
And today’s low interest rates are partly the result of strong worldwide demand for U.S. government bonds. Over time, however, rising deficits and debt could become a problem. Deficits add to the debt, since the debt is essentially the total of all past deficits. Long-term issues will need to be addressed, including projected increases in Social Security, Medicare and Medicaid spending, which are the fastest-growing budget categories. Due to serious disagreements about how to reduce the debt and deficit, and no easy answers, we don’t expect any resolution short term. Overall, however, while debates over the federal budget and the debt ceiling may be disruptive, we don’t think they’ll prevent continued economic growth and higher stock prices over time.
Raising the Debt Ceiling Again
The federal debt continues to grow, reaching more than $18 trillion. Net federal debt – everything except debt the government holds itself – is about $13 trillion or 75% of GDP. That looks like a big percentage, but it’s not too different from many other developed countries. And keep in mind that the U.S. is wealthy and well-positioned compared to Greece and other countries facing more challenging debt troubles.
The debt ceiling has been increased 78 times since it was enacted in 1960. According to the Treasury Department, another increase will be required later this year. While we hope it will happen without controversy, waiting until the last minute or hinting of another government shutdown could disrupt markets short term. Make sure you’re prepared for the headlines, and don’t overreact or derail your long-term strategy in response.
Don’t Get Distracted by Debt Debates
Stocks have risen over time regardless of the size of the debt or the deficit.* And we think that will continue, even though politicians may occasionally trigger some volatility as they address current issues. While you may worry about the burden placed on future generations, remember that the faster the economy grows, the easier it is to resolve these issues.
When debates about how to address the deficit ramp up, here’s how you can make sure you’re prepared:
• Tax diversification – Consider the possibility of higher taxes in the future as well as possible benefit reductions, since future policies aren’t predictable. Owning investments that are taxed in different ways can help.
• Staying on track – It might be tempting to stay on the sidelines due to campaign promises or political uncertainty, or until you’re more comfortable about the size of the government debt. But realize that this might actually prevent you from reaching your financial goals.
No one knows exactly what the government will do, but don’t let policy uncertainty dictate your future. You know what you want your future to look like, so make sure you’ve worked with your Edward Jones financial advisor on a strategy designed to help get you there.
* Past performance is not a guarantee of how the markets will perform in the future.
Edward Jones - Mark Grooters: Financial Aadvisor