After plenty of haggling, and a fair amount of political theater, Congress reached a last-minute agreement to raise the debt ceiling and end the partial government shutdown. Most people would agree that a fully functioning government that can pay its bills on time is a positive thing — and it’s certainly good news for investors, because a default on the part of the U.S. government could have had serious repercussions in the financial markets. But what’s next?
We may find out fairly soon, because the legislation that passed only funded the government through Jan. 15 and raised the debt limit through Feb. 7.
But as an investor, you don’t have to wait until next year to respond to these ongoing political issues.
Consider taking the following steps: Look for opportunities. The stock market didn’t overreact to the drama in Washington. Also, despite the likely short-term drag on the economy caused by the partial government shutdown, U.S. companies have shown that they are able to increase earnings, even with slow sales growth — and corporate earnings are a key driver of stock prices. These are all good signs for investors. And stock valuations (as measured by price-to-earnings ratios) are reasonably attractive. So, now may be a good time to pursue new investment opportunities, assuming they’re appropriate for your individual needs, goals and risk tolerance.
Be prepared for volatility. The financial markets have their “likes” and “dislikes” — and one thing they don’t like is uncertainty. So, despite the fact that the markets stood up pretty well during the shutdown/debt ceiling episode, it’s still quite possible that we’ll see some volatility in the weeks ahead. To prepare yourself for these potential fluctuations, you’ll want to own an appropriate mix of investments — which means you may need to rebalance your portfolio. A diversified portfolio can’t guarantee profit or protect against loss, but it can reduce the impact of volatility — and it can help keep you calm, too.
Be aware of interest rate movements. If the debt ceiling had not been raised, it’s highly possible that we would have seen a spike in interest rates, which could have hurt the value of your bonds. (When interest rates rise, investors won’t pay full price for existing bonds because they can get newly issued ones at the higher rates.) But even though we avoided this scenario, you’ll still need to be on the alert for interest-rate movements over the next several months — especially if the Federal Reserve discontinues its bond-buying program, which is designed to help keep long-term rates low. Still, it’s probably not a good idea to totally avoid bonds in anticipation of rising rates, because bonds can help balance your portfolio if stocks were to decline. Nonetheless, keep a close eye on the Fed’s actions, and be prepared to make changes if it appears that rates may indeed jump.
Apart from registering your opinion with your elected representatives, you can’t control what happens in Washington. But, no matter what political conflicts are taking place, you can control your investment decisions — and you can continue with a strategy that can help you make progress toward your long-term financial goals.