#271 Will the Market Crash if Trump is Elected?

Investors spend a lot of time worrying about the market implications of the political season. Guest Taylor Tepper, who is a writer at Money, says that's a mistake. Despite all of the worries about a Trump presidency, Taylor says that the stock market will NOT crash if Donald Trump were elected president. That's just one of the topics we covered in a great conversation that ranged from market implications of elections to the national debt, to a lightning round on how to reform the U.S. tax code.

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I met Taylor through my work at Money, where we have shot some great videos, including this one on the Department of Labor Fiduciary rule, this one about working in retirement and the one about bonds can be riskier than you think, which is when I discovered that Taylor likes this money and investing stuff as much as I do!

Here are Taylor's two recent articles that we reference during our interview:

"No, the Stock Market Won’t Crash if Trump Is Elected President"

"5 Things Most People Don't Understand about the National Debt" 

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

One-on-One with Mohamed El-Erian

It’s not every day that you are fortunate enough to interview a world-renowned economist, but that’s just what happened to me last week. I sat down with Mohamed El-Erian, the soon-to-be former CEO of PIMCO at LinkedIn’s FinanceConnect 2014. Over the course of nearly an hour, El-Erian outlined his thoughts on the global economy, Federal Reserve policy (and new chairwoman Janet Yellen) and what ordinary investors should be doing right now. The good news is that El-Erian believes that for Main Street, 2014 will be a better year than 2013. The bad news is that while the recovery continues, the economy faces three major issues: a debt overhang from the boom and bust, a labor force that requires re-tooling and an outsized reliance on households to drive growth. The combination has pushed the US towards what he calls a “T-Junction”: As the economy approaches the intersection, it can veer in one direction, where the system will continue to heal; or in the other direction, where growth remains low and consumers and the government remain under pressure due to heavy debt loads. El-Erian put the odds of either outcome at a sobering 50-50.

When I asked about the nation’s debt problem, he responded with four potential solutions: (1) Grow our way out (the best case) (2) Default (see: Detroit) (3) Austerity (see: Europe) and (4) Rely on “artificial stimulus” from the Federal Reserve (see: US from August 2010-present). El-Erian acknowledged that while the first solution would be the best, it requires participation from lawmakers. Without Congress, the Fed’s monetary policy has become the next, best solution, at least in the short-term.

The problem with the Fed’s current policies, according to El-Erian, is that as we move further from crisis mode, the cost and risk of highly accommodative policy outweigh the benefits. In other words, it’s one thing to rely on zero percent interest rates and bond buying to normalize markets amid a financial upheaval, but five+ years later, the risk of asset bubbles exploding becomes more threatening than the potential that the wealth effect will further boost economic growth.

On the positive side, El-Erian believes that Janet Yellen is up to the task of unwinding the policy she helped create. He said that she was not only a “qualified economist” with “a passion for policy,” she was also “caring, gracious and inclusive.” That said, the removal of liquidity from the system is bound to create more volatility for investors and he warned anyone with money at risk in the markets to “Come up with a plan for the worst-case scenario,” and determine which mistake you can avoid making, because “Volatility plus human nature means you are going to do the wrong thing at the wrong time.”

MARKETS: Investors chalked up weak data to the severe weather and drove stock indexes to their best week of the year. Emerging markets, where much of the winter turmoil began, are up 6.9 percent since the Feb. 3 lows.

• DJIA: 16,154, up 2.3% on week, down 2.5% YTD
• S&P 500: 1838, up 2.3% on week, down 0.5% YTD (+5.6% since Feb 3 lows)
• NASDAQ: 4244, up 2.9% on week, up 1.6% YTD (Highest close since 7/17/00)
• 10-Year Treasury yield: 2.75% (from 2.68% a week ago)
• Feb Crude Oil: $100.30, up .4% on week
• April Gold: 1318.60, up 4.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.39 (from $3.64 a year ago)

THE WEEK AHEAD: After the day off, a fresh round of data from the nation’s real estate market is due. The pace of activity is expected to slow, with sales likely dropping by over 5 percent from year-ago levels. Part of the fall-off is likely attributable to the current goat - bad weather, though housing experts note that the slowdown should be expected, because last year’s rapid pace is simply not sustainable.

Economists are trying to determine the effect of the severe weather on the economy. While most statistics are adjusted to strip out normal seasonal patterns, a challenge arises when winter weather is much worse than normal, like the recent spate that the nation has experienced. Economists believe that Q1 growth is likely to drop by an annualized 0.3 percent to 2.2 percent. The good news is that after the weather returns to normal, consumers might unleash pent-up demand, helping to spur a marked improvement in overall economic activity.

Mon 2/17: US MARKETS CLOSED FOR PRESIDENT’S DAY

Tues 2/18:

Coca-Cola, Herbalife

8:30 Empire State Manufacturing Index

10:00 NAHB Housing Market Index

Weds 2/19:

Tesla

8:30 Housing Starts

8:30 PPI

2:00 FOMC Minutes

Thurs 2/20:

Groupon, Hewlett-Packard, Nordstrom, Wal-Mart

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed Survey

Fri 2/21:

10:00 Existing Home Sales

Sat 2/22

G-20 finance ministers meet in Sydney, Australia

Will Hitting the Debt Ceiling be Catastrophic?

With the government partially shutdown and the nation moving closer to the debt ceiling, how bad will this mess get? The Treasury Department released a report, which noted, “The United States has never defaulted on its obligations…a default would be unprecedented and has the potential to be catastrophic.” Catastrophic is a pretty scary word, so what exactly will happen on October 17, when the nation can no longer juggle the books and needs to borrow more than the statutory limit of $16.7 trillion?

Treasury expects it would still have about $30 billion cash on hand to cover its bills. Between money coming in and obligations, we can make it to the end of the month, but then things gets dicey. On November 1 there is $25 billion bill for Social Security and on November 15, a $30 billion interest payment on government bonds is due. Without an increase to the debt ceiling, neither will get paid on time, which would qualify as a technical default.

The mere whiff of a default could throw financial markets into disarray. Treasury says that “credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

Most traders agree that if a default were to occur, it could make the August 2011 debt ceiling swoon look like child’s play. In August 2011, Congress came to a last-minute deal to avert hitting the debt ceiling, but it was too late: ratings agency Standard & Poor’s downgraded the credit rating of the United States by one notch and the S&P 500 stock index subsequently dropped by more than 17 percent. Given the bad memories of 2011 and the credit freeze of 2008, there is widespread belief on Wall Street that not even the most extreme members of Congress would allow a default to occur.

Some legal experts have said that the President could invoke emergency powers if Congress could not come to an agreement. According to the New York Times, there are three options: “One is grounded in an aggressive understanding of presidential power, the second in an interpretation of an obscure provision of the 14th Amendment and the third on a choice among three irreconcilable constitutional obligations.” But White House officials maintain that the President will not act alone and that Congress must provide the authority to borrow money.

What about Treasury’s claim that "even the prospect of a default can be disruptive to financial markets and American businesses and families." There is some evidence that we are already seeing the ill effects of both the government shutdown and the debt ceiling: stocks have dropped about 3.5 percent in the past two weeks and confidence could erode as the negotiations drag on. That's why the National Retail Federation said that Congress could blow a hole in its holiday sales forecast. "Our forecast is also somewhat hinging on Congress and the Administration’s actions over the next 45 days; without action, we face the potential of losing the faith Americans have in their leaders, and the pursuant decrease in consumer confidence."

As the battle on the debt ceiling nears, it’s important to underscore that Congress has already agreed to spend a certain amount of money, by virtue of the annual budgets that come to the floor for a vote. After budget resolutions are passed, if the government cannot meet its obligations from revenue, it borrows money by selling bonds. Increasing the debt limit does not authorize new spending commitments; rather it allows the government to finance existing obligations that Congresses and presidents have made.

For decades, lawmakers increased the debt ceiling as a course of business. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit under both Republican and Democratic presidents.

So what’s an individual investor to do? Stick to your long term balanced approach. Looking back to 2011, the year felt like a roller coaster, but it ended more like a merry go-round. The S&P 500 was up by over 8 percent in the spring, was down 12 percent over the summer and finished the year nearly unchanged at 1257.60, a drop of -0.003 percent for the year, the smallest annual market move for the S&P 500 since 1947. While we are rooting for Congress to do something, the best prescription for investors may be to do nothing!

MARKETS:

• DJIA: 15,072 down 1.2% on week, up 15% on year
• S&P 500: 1690, down .07% on week, up 18.5% on year
• NASDAQ: 3807, up 0.7% on week, up 26.1% on year
• 10-Year Treasury yield: 2.65% (from 2.62% a week ago)
• Nov Crude Oil: $103.84, up 0.9% on week
• Dec Gold: $1309.90, down 2.1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.36

THE WEEK AHEAD: The Federal Reserve is self-funded, so it will release the monthly Consumer Credit report, as well as minutes from the last Fed policy meeting. Other government reports in italics are due to be released, subject to the status of the partial shutdown. Meanwhile, as the shutdown continues, companies will begin to report corporate earnings. Although earnings increased by just 5 percent in the first half of the year, stock indexes have more than tripled that growth rate. Thompson Reuters estimates that third-quarter earnings will increase by 4.9 percent

Mon 10/7:

3:00 Consumer Credit

Tues 10/8:

Alcoa

7:30 NFIB Small Business Optimism

8:30 International Trade

10:00 Job Openings and Labor Turnover (JOLTS)

Weds 10/9:

2:00 FOMC Minutes

Thurs 10/10:

Chain Store Sales

8:30 Jobless claims

8:30 Import/Export prices

Fri 10/11:

JPMorgan Chase, Wells Fargo

8:30 PPI

8:30 Retail Sales

9:55  Consumer Sentiment

10:00 Business Inventories

Debt Ceiling, Part Deux

Here we go again. It was just over two years ago when Congress fought about increasing the nation’s borrowing limit. After that battle, ratings agency Standard & Poor’s downgraded the credit rating of the United States by one notch and the S&P 500 stock index subsequently dropped by more than 17 percent. Two years later, the economy and markets are in better shape, but that doesn’t mean that a fiscal battle would be welcomed by anyone. Right now, Congress is fighting over two issues: the funding of the government and the looming debt ceiling. The country is expected to reach its current $16.7 trillion debt ceiling in mid-October. Both sides have drawn their respective lines in the sand, which means that we should prepare for “Debt Ceiling, Part Deux”!

A quick primer on a few basics:

• $1 trillion = $1,000 billion or $1,000,000,000,000 (that's 12 zeros)
• Annual surplus/deficit = money government takes in minus the money government spends. If the number is positive, there is a surplus; and if it’s negative, there is a deficit
• FY 2012 US deficit = $1.1 trillion
• FY 2013 budget deficit = $973 billion when proposed, but in its mid-year update, the Congressional Budget Office (CBO) said the deficit is expected it to drop to $642 billion
• National debt = Total amount borrowed over time to fund the annual deficit
• Current national debt (as of August 1) = $16.7 trillion (or $52,943 per for every person living in the US or $138,240 per taxpayer)

• The U.S. national debt has more than doubled since the year 2000. In May, CBO projected that the FY 2013 deficit would be $642 billion, or 4 percent of GDP.  That is down from a deficit of 10.1 percent in 2009
• Debt ceiling is the maximum amount of debt that Congress allows for the government. The current debt ceiling is $16.7 trillion, effective January 31, 2013

• The U.S. government has to borrow 43 cents of every dollar that it currently spends, which is four times the rate in 1980

As the battle on the debt ceiling nears, it’s important to underscore that Congress has already agreed to spend a certain amount of money, by virtue of the annual budgets that come to the floor for a vote. After budget resolutions are passed, if the government cannot meet its obligations from revenue, it borrows money by selling bonds. Increasing the debt limit does not authorize new spending commitments; rather it allows the government to finance existing obligations that Congresses and presidents have made.

The concept of a debt ceiling goes back to the early 20^th century. During World War I, Congress put a limit on federal debt so that the Treasury would have more discretion over borrowing. In the 1930s, Congress moved towards aggregate constraints on federal borrowing that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.

For decades, lawmakers increased the debt ceiling as a course of business. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit under both Republican and Democratic presidents.

What happens if there is no deal to increase the debt ceiling? Without sufficient funds to pay the bills, the government must decide which payments come first. During the 2011 debt ceiling kerfuffle, the Administration said that it would pay the interest on its debt, Social Security benefits, Medicaid and Medicare payments, unemployment benefits and salaries for military personnel in action. Other areas, like salaries of “non-essential” federal workers, Pell grants for college students, highway construction and education programs might all have to wait.

Additionally, ratings agencies would take a dim view on a protracted fiscal fight. The big difference between the last time this occurred and today is that interest rates have already begun to rise. Worries that the government battle would persist could push yields even higher, worsening the deficit problem by increasing required interest payments on the debt.

Now that you are an expert on the debt ceiling, maybe you can more confidently reach out to your congressman/woman to urge them to make a deal on the debt before we hurtle off the fiscal cliff once more.

© 2013 TRIBUNE MEDIA SERVICES, INC.