Tuesday, 22 October 2013

The US Government Shut-Down has me reconsidering my sector allocations

I posted recently that I was rather disappointed that the markets had not over-reacted to the news of the US government shut down and I was hoping that it would go a bit nuts and that there would be a buying opportunity.  It appears that I may have missed some short term gains as the market rebounded significantly in the days following the apparent resolution of the crisis.

Below is a chart of the US share market (represented by the S&P500) and how it performed in the lead up to (in anticipation of) and during the shut down as well as the strong rebound post the shut down.  Although the market did slip early on the market did not really over-react however as outlined before, perhaps people are celebrating too soon.

However...before you think that everything is back to normal...

The solution the US government comes to appears to be a short term solution - i.e. the government is only being funded until January 2014 and the US will once again have to raise their debt ceiling a month later.  Although I try and keep abreast of US politics for financial reasons (and because the drama is frankly more interesting than anything I have in Australia) I do not have a deep understanding of what it would take to resolve the situation.

It seems to me that the US politicians are going to be shooting themselves and the US economy in the foot if they continue to govern and negotiate through crisis tactics. Further it is pretty to easy to see why it is bad for the US economy and share market to continue to do so.

If both domestic and international (e.g. me) investors are unsure about when these types of crises are going to hit again we are going to require a greater premium on our investments (such as interest rates) or demand a higher return on our shares to compensate for the fact that the market seems to blow up every few months based on the newest drama created by US politicians.  This means that borrowing costs for the US government are going to be higher than they would ordinarily be and the share market is going to bake in a discount to account for the fact that there is more short term volatility.

What does this mean for my investment strategy?

Although the share market has responded significantly since the announcement of the short term resolution to the crisis, the US dollar has
fallen significantly.  I am considering selling my US stock holdings and holding US cash until the next opportunity to buy comes along.

I have been hit pretty hard with my employee share plan because this is in a US based company and the falling dollar has wiped a significant amount of my gain. I do not want to sell these yet because I have already lost much of the advantage of them so am willing to hold them.  It's not a position that I'm happy to be in.

What this crises has caused me to do is to consider allocating some of my international investment portfolio away from the US to other developed economies such as the UK.  I do not think Europe is 'safe' just yet...it's just less volatile than the US (and that is certainly saying something).

Macro bets are inherently hard to make ans so I'm not going to rush and make this decision and I may do it in a more piece meal fashion.  Complicating these decisions is the fact that I am probably going to need a fair bit of this cash within the next 1 - 2 years as I am house hunting (for myself - not investment purposes) and so the normal investment horizon does not exist.

Did the US shut down mean anything for you?  Are you more uncomfortable with investing in the US now than you were before the shut down or does it make little difference to you?

You May Also Be Interested In
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