VOL. 126 | NO. 140 | Wednesday, July 20, 2011
David Waddell
The Worldly Investor
Debt Debate Will Soon Pass
David Waddell
Welcome Back, Ben. All hail the Bernanke put! Markets rallied strongly Wednesday, July 13, as Fed Chairman Ben Bernanke hinted at the potential for additional monetary easing should high unemployment and deflation threats persist. Since the greatest achievement of QE2 was the rapid rise in equity prices, talk of additional easing elated Wall Street. Gold rallied to a new nominal high, and oil seems determined to reclaim $100. Whether the Fed resumes sizable asset purchases or not, by indicating their willingness to do so, they have underpinned asset prices.
Earnings releases to date also provide underpinning, as early reports have driven quarterly growth expectations higher. Finally, China’s 9.5 percent GDP growth in the second quarter surprised to the upside, dispelling fears of global deceleration. The combination of global economic resilience, Fed vigilance and earnings persistence makes a strong counterweight against sovereign debt concerns.
We believe we are in the process of resetting the trading range. A valuation-supported lower band of 1300 rather than 1250 relies on earnings meeting estimates, which appears likely. The upper band will be defined by sentiment and expectations.
Look for markets to feel their way through the new trading range within the next few weeks. The more meaningful progression applies to the low end of the range, as fundamentals are more endearing and reliable than sentiment. Barring macro-catastrophes, dips below 1300 clash with low valuations, Fed support and Chinese growth and should be short lived. Consider 1300 on the S&P 500 the new battle line.
The Debt Limit Investment Strategy
Please recognize that the debt ceiling has been a stage for political theater for nearly a century. The first official “debt limit” was $45 billion in 1939! Since 1962 alone there have been 75 alterations to the limit. Each time we approach the limit, political rhetoric engenders fear and exasperation. This particular moment heightens the drama a bit, but expect the standard sequence of teeth gnashing followed by reluctant last minute handshakes. Now, I could be wrong. It might be different this time. Failure to raise the ceiling could roil the markets and lead to a dramatic re-pricing of risk. Given that possibility, why hasn’t the Treasury market sold off? The 2.9 percent yield on the 10-year Treasury conveys the market’s confidence that a deal will consummate. Some argue that failure could press yields even lower as the world perversely purchases Treasuries as a Pavlovian safe haven. With the odds of impasse low, and the effect of impasse on interest rates unknown, the debt ceiling circus makes a poor input into investment decision-making. Those currently invested should remain so and those considering investing should focus on valuations, economic growth and earnings results. While I am deeply concerned about our long-term fiscal capabilities, the moment to address significant reforms comes next November at the ballot box. The current moment has deteriorated into preparation for that event. Campaigners don’t benefit from creating disasters. One way or another, the limit will rise, and the debate will be forgotten.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.