Joanna Shatney, Schroders

Déjà vu… Another US budget deadline

Following the news that the US government has failed to agree a budget, Joanna Shatney, Head of US Large Cap Equities shares her views on what this means for US markets…

Haven’t we dealt with this before? With political gridlock over the 2014 budget, we have breached another US government deadline. And once we get past this issue, there is another one right behind it surrounding the need to raise the debt ceiling by mid-October.

The market was down slightly yesterday, but as we look toward the growth opportunities for the US economy and corporate profits over the next three years, we think any weakness in over the short-term should be buyable. While the largest risk is that we go into a long-term shutdown, we believe any real decisions will get pushed into December (or later), when it will have to be dealt with again. 

So what is happening? The latest of the ‘worry’ rungs to climb is the US government stalemate around the funding of ‘Obamacare’ or the Affordable Care Act (ACA). House Republicans have made the main issue in this debate about defunding the ACA. Initially, we had been hopeful that the Republicans would pass the bill, finding some reconciliation in the Senate, which had reversed/omitted the defunding portion of the bill. However, this has not happened and we are now in shutdown.

The bigger issue is the need to increase the debt ceiling target in mid-October. Failure to do so could lead to outcomes as dire as a US debt default, but we are generally in the camp that this will get worked through. It is most likely that the decision will be delayed into December, when it will again become a worry for investors. 

We are still bullish long-term. The S&P500 is up 19% this year, and we are optimistic about the long-term as firstly we don’t see the market as overvalued and secondly, the rally is supported by fundamentals – the market is 10% above its prior peak and corporate profits are 20% above their prior peak. We welcome investor worries in order to have a ‘wall of worry’ to climb. However, when compared to summer 2011, the US economy is stronger than before, the Fed remains accommodative (QE2 had just ended in 2011), and global growth prospects (including Europe) appear more stable.

In our view, the greatest risk to our thesis is that one or more of the following plays out: Firstly, default on debt, secondly, the impact on GDP is worse-than-expected or thirdly, government impasse negatively impacts corporate and consumer sentiment.

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