Uncertainty Is the Only Certain Thing
Each morning we wake up with a set of assumptions: the sun will rise, our light switches will work and water will flow from our faucets. We expect roads to be passable and our government to keep our systems of law and commerce operating. While some things seem beyond question (the sun really will rise in the east), others are up for debate. What happens when the systems on which we rely become unpredictable?
As we head into October we’re facing increasing uncertainty on a number of fronts. In Europe there’s talk of yet another Greek bailout. The nation is now in its sixth year of recession, still struggling with debt repayment, high unemployment and a lack of growth. If that isn't bad enough, there are now calls for a Special Forces Reserve Union military coup. Meanwhile, the International Monetary Fund (IMF) expects Spanish unemployment to remain above 25% for at least the next five years. Spain’s real estate market is in free-fall, refusing to find a bottom. Today, the situation in southern Europe is no more certain than it was at the onset of the global financial crisis.
Back home we have our own worries. For months the members of the Federal Reserve Open Market Committee (FOMC) hinted that they would start to wind down the quantitative easing (QE) program. Then in late September, just when everyone thought the Fed would announce a start to the long-anticipated taper, chairman Ben Bernanke said the economy was not yet strong enough to stand on its own and QE would continue indefinitely. Naturally, this confused almost everyone. It was as if the Fed, which had been signaling a slowdown for months, came out and said: "Just kidding!" It appears the Fed has no idea how it will smoothly wind down QE. In its attempt to create more open communication and guidance with investors, it created more uncertainty, not less.
If market confusion isn't enough, the U.S. federal government decided to pile on at just the wrong time. We face yet another debt ceiling deadline in mid-October. Rather than attempting to agree on a sustainable and workable framework for government spending, our elected representatives instead have decided to play a game of political chicken. At stake is a shutdown of the federal government. While our expectations of government performance may be low, we at least expect it to remain open.
One of the bones of contention in the debt ceiling debate is funding for the Affordable Care Act (ACA). On October 1 the ACA goes live and it appears few people know what that means. In fact, a recent USA Today/Pew poll found that only 25% of the respondents claimed to understand the new health care law very well. Others don’t know how they will get insurance, much less pay for it. Given that obtaining insurance is now mandatory, this qualifies as a level of chaos.
Each of these trends and situations is weighing on capital markets around the world, causing volatility and a lack of direction. We expect the smoke to clear on some of these issues, like the debt ceiling and budget debates in the U.S. While this would likely give some relief to equities, such relief would only be fleeting, as there is always another worry right around the corner. That’s why we develop, maintain and consistently reassess our financial plans to make sure we’re taking the best direction possible given the facts on the ground today.