Washington

While a potential debt ceiling deal failed to gain much traction over the weekend, I’m still reasonably optimistic that some sort of patchwork and limited deal to, at least temporarily, extend the debt ceiling will be reached around this Thursday’s deadline.

But while I believe a US default will be avoided, the continuing political drama does have implications for investors. As I write in my latest weekly commentary, there are three:

1.    Economic growth will be slower than it otherwise would be. Were it not for all of the political turmoil and uncertainty, I would expect fourth-quarter US economic growth somewhere between 2.5% and 3%. Given the drama in Washington, 2% gross domestic product (GDP) growth is a more likely number.

2.    The Federal Reserve (Fed) will probably adopt a slower pace to tapering. The current political backdrop is causing more economic uncertainty, and the government shutdown is delaying the release of economic data that the Fed relies on to make its policy decisions.

3.    Consider international equities. In today’s economic and political environment, investors (particularly those who are overweight US stocks) may want to consider moving more of their assets into international equities. International stocks are less expensive than US equities and the US budget impasse calls into question the United States’ safe-haven status.

To be sure, in the near term, any budget agreement would be viewed as a positive. Still, as I wrote last week, if the best Washington can do is a series of short-term extensions, there will be an economic price to be paid. Ongoing, and elevated, levels of political uncertainty will act as a drag on business and consumer confidence, weaken economic growth and spark higher levels of market volatility.

In fact, there already are signs that the government shutdown is causing growing economic pessimism among US consumers. The University of Michigan’s index of consumer sentiment recently hit its lowest level since January, and in general, lower confidence leads to lower spending — a negative for economic growth.

 

Source: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

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International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.