Unexpected Outcomes From Debt Ceiling Debate

First, I want to congratulate all of you for keeping your calm about the debt ceiling debate. I did get 2 calls about it from someone who is not on the distribution list. With the news media on hyper-drive covering this topic staying calm was exceptional on your part, good job!!!

The first paragraph is the weekly recap from Vanguard. In the middle, are some unexpected outcomes from the debt ceiling debate. Lastly, is some trivia to lighten the mood.

Vanguard

With the federal debt ceiling debate serving as a shadowy backdrop, the latest economic reports continued to paint a picture of an economy struggling to sustain a recovery. The first estimate of second-quarter gross domestic product was lower than hoped, but the figure for the previous quarter was revised downward so much that the latest number represented an uptick. The Federal Reserve's latest survey confirmed a slowing economy, while new-home sales and durable-goods orders also retreated a bit. For the week ended July 29, the S&P 500 Index fell 3.9% to 1,292 (for a year-to-date total return—including price change plus dividends—of about 3.9%). The yield on the 10-year U.S. Treasury note fell 17 basis points to 2.82% (for a year-to-date decrease of 48 basis points).

Unexpected Outcomes From Debt Ceiing Debate

Remember last Sunday night, it was stated that if a vote was not passed on the debt ceiling that the "markets would go into a panic. The first unexpected outcome was that even with all of the politicians, news commentators, and financial experts telling that the "markets" would panic and have a dramatic fall it did not occur, down 3.9%. The reason for this is the very positive economic news this week such as earnings reports, and jobless claims.

The second unexpected outcome was that long term interest rates went down this week by 0.17%. Remember that the experts stated that this default uncertainty would have cause long term rates to have a huge rise. If you are a bond trader, you would want another week like this last one. The reason these rates went down is because of the principles of supply versus demand. Since the U.S. Treasury is at the limit of issuing new bonds the supply has dried up. With reduced supply, the price goes up and interest rates fall. When interest rates go up after this deficit debate is over it will be because of supply and demand, not because of a potential credit rating scare.

Here is the bottom line: The experts can not predict the outcome in the short-term from this deficit debate. If you avoid the hype and keep you focus on the bigger financial picture of improving corporate earnings and an improving economy, as Japan recovers and we rebuild from the disasters of the spring, an investor has a better long-term result.

July 29 Trivia

1890
Artist Vincent van Gogh died of a self-inflicted gunshot wound in Auvers, France.

1958
President Eisenhower signed the congressional act that created the National Aeronautics and Space Administration (NASA) was authorized by Congress.

1968
In Humanae Vitae (of Human Life), Pope Paul VI reaffirmed the Catholic Church's prohibition on artificial methods of birth control.

1981
Prince Charles, heir to the British throne, married Lady Diana Spencer.

2003
Red sox switch hitter Bill Mueller became the first baseball player to hit grand slam home runs from both sides of the plate in the same game.

Just thought you would like to know some real history on this date.