Investors wary and weary, but not panicked over debt ceiling standoff

After plunging early in the week over fears that the United States might default on its debts, stocks rallied Thursday and Friday after House Republicans showed a willingness to temporarily extend the debt ceiling for six weeks.

Investors clearly were cheered by the prospect that negotiations had begun.


But even if a deal is reached along those lines, it would be a temporary reprieve. Investors would endure six more weeks of uncertainty over whether lawmakers will push the country into default.

"It means it will be a rough Thanksgiving," said James Hardesty, chairman of Hardesty Capital Management in Baltimore.


Investors have been here before, two years ago, when the country avoided a default at the last minute but still saw its credit rating downgraded. This time around, the Treasury Department says the nation's borrowing limit of $16.7 trillion must be raised by Oct. 17 or the country won't have enough money to pay all the obligations that Congress previously approved.

Maryland financial advisers say they are fielding questions about the debt ceiling from clients, but the calls are fewer than last time. While a few panicked investors are seeking cover, most are concerned yet sticking to their investments, advisers said.

"Clients are more calm. They have weathered the storms before," said Debra Kriebel, a partner with Pinnacle Advisory Group in Columbia. "They are very comfortable as to where they are in terms of their investments."

An online survey this month of nearly 700 investors by TD Ameritrade found that 37 percent had not made any portfolio changes lately, assuming that the government shutdown and debt ceiling debate would be settled quickly. Another four out of 10 said they might pull back on investing if these issues drag on, while 10 percent have temporarily moved more into cash.


The online brokerage also found that nearly three-quarters of investors surveyed say the government shutdown and threat of default has lowered their confidence in the economic recovery.

Kriebel said the comments she hears from clients often involve frustration with lawmakers, such as, "Why can't they get along and play nice?"

She wishes that Congress would resolve the issue now instead of weeks later so the rest of us can move on.

"As it's pushed down the road, obviously, your blood pressure goes up and your anxiety level goes up," she said.

Christopher Brown, president of Ivy League Financial Advisors in Rockville, received two calls and an email from worried clients. Brown said he tells clients he can't guarantee that the government won't default, but he doesn't believe it will happen.

"It's stressful for everybody," he said. But some clients can't handle it, fearing a repeat of the market crash during the financial crisis five years ago.

Two clients recently wanted to pull $300,0000 to $400,000 out of investments and switch to cash while waiting out the storm, Brown said. Only one went through with it.

Brown said he's glad the president and lawmakers from both parties are talking, but everyone's patience is wearing thin.

"I suspect many of my clients are nervous. They aren't panicked, but they are nervous," said Jim Ludwick, founder of MainStreet Financial Planning in Odenton.

He's heard from a handful of them.

"They don't know what to do," he said. "They think the stock market and the bond market will tank."

His advice: Stop watching television that hypes the political drama. "If you have to watch television," Ludwick tells them, "you can only watch HGTV or Turner Classic."

The planner predicted that if a lack of progress on the debt ceiling spooks the market, he's not the only one who will be hearing from his clients.

"If the market drops 800 or 1,000 points, they will let their representatives know."

Tim Maurer, a planner with Financial Consulate in Hunt Valley, said his clients are concerned but also are feeling something else.

"There is uncertainty fatigue," Maurer said. That comes from major market swings in the past 13 years stemming from the bursting of the Internet bubble, the housing market bust, the 2008 credit crisis and all the political drama in Washington.

Maurer said his clients' portfolios already had a conservative bent, but he made adjustments in the past two months that build on that, such as increasing cash reserves, investing in funds with bonds of shorter maturities and diversifying outside the United States.

Richard Cripps, chief investment strategist with EquityCompass Strategies in Baltimore, said he's not changing his strategy, but money flowing in to be invested in the market is off by about 60 percent this month. Some clients are holding onto cash.

"They are on the sidelines" and waiting to jump into the market once a resolution is reached, he said. In past financial standoffs in Washington, stocks fell as negotiations stalled, only to recover lost ground and rally even higher within a week of a final agreement, he said.

Other portfolio managers are making adjustments — or waiting to do so based on what happens in Washington.

Fidelity Investments, for instance, said in a statement that it expects Congress to raise the debt ceiling and avoid default, and the company's money market funds continue to have significant holdings in U.S. Treasuries. Nevertheless to protect investors, Fidelity increased the amount of cash in its money market funds and sold government securities that mature later this month to "avoid even the remote possibility of minor delays in payment" if the debt ceiling isn't raised.

Fidelity took similar steps during the 2011 debt ceiling stalemate.

Steve Huber, manager of the T. Rowe Price Strategic Income Fund in Baltimore, said he's making sure that he has enough cash on hand to take advantage of the high volatility that will come if default appears possible.

After Standard & Poor's downgraded the country's credit rating following the 2011 debt ceiling crisis, credit-sensitive sectors such as high-yield bonds and emerging market debt took a hit and then rebounded later, he said.

"It was a really good entry point into those sectors," said Huber, who took advantage of that last time and is poised to do so again.

Huber said he thinks lawmakers will reach a solution without a default, but he's concerned that a drawn-out battle could end up hurting economic growth and business confidence.

Hardesty, whose firm manages $800 million, has shifted from holding 4 percent in cash in mid-August to 10 percent now. The move has less to do with a potential default than the fact that stocks have risen so high that it was time to take some profits, he said.

"It's a long time since we had a rest or a correction," he said.

But Hardesty, too, is fed up with lawmakers' brinkmanship over the debt ceiling.


"It's a very dangerous game of political chicken," he said.



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