When it comes to life’s big occasions, nerves can affect us all. It is bad enough when we are dealing with an important event that has a known outcome like a wedding. But for an event where the outcome is less certain, like a big job interview (or a visit to the dentist), performance anxiety can hit the best of us.
The markets are often no different. The US government is expected to reach its debt ceiling in early October and the implications for global markets are far from certain. Therefore, we did our own research into the possible consequences, focusing on the potential impact on asset class returns and US macroeconomic indicators.
We started by analysing the performance of key market indices – the S&P 500, the MSCI Emerging Markets Index and the MSCI Europe Index – in the periods around the crises of 2013 and 2011. In August 2013, the US Treasury informed Congress that if the debt ceiling were not raised, the US would default by mid-October.
Yet these events had no significant adverse effect on markets. Indeed, in the three months before the resolution of the crisis on 16 October, the S&P 500 actually gained 2.5 per cent, the MSCI Emerging Markets Index gained 8.2 per cent and the MSCI Europe Index gained 4.9 per cent. So the US stock market felt some short-term pain, but it appears that this was not sustained in the longer term.
Next, we investigated whether the events caused any noticeable changes to consumer sentiment and payrolls. Consumer sentiment did take a dip during the crisis, but the trough was still ahead of April 2013’s level. Similarly, payroll gains took a slight hit during the crisis, but in the grand scheme of things, this does not look like a significant move.
Turning to the 2011 crisis, politico-economic events had a more noticeable impact on the three equity market indices we looked at, with a significant downturn in August of that year. The debt-ceiling crisis led to S&P downgrading US sovereign debt from AAA to AA+ for the first time in the country’s history, just a week after the government had passed a bill to address the problem, on 2 August.
The announcement led to the S&P losing 6.66 per cent on the day and knocked global markets. The significant losses between July and mid-August were in the -16 per cent to -18 per cent range for all of the three indices.
We also saw a similar pattern in the consumer sentiment figures and payroll gains. Consumer sentiment took a hit in the month, but then recovered quite significantly afterwards. Non-farm payrolls wobbled only slightly in the periods that coincided with the height of the debt crisis and recovered quite significantly afterwards. If we reach a heightened period of crisis now, we can expect transitory weakness in this macro data. But if this resolves itself, the current risks should not derail the US macro picture of strong growth and the mid-to-late-cycle expansion.
There is one key takeaway here. Markets have had to deal with significant levels of political risk in the past eight months, but in this kind of environment, it is more important than ever to keep nerves in check and focus on fundamentals, improving economic and earnings growth.
Nerves can serve a useful purpose by helping us to avoid undue risk, but history shows that investors have been rewarded for ignoring the short-term political risks and taking a longer-term view of investing. And while upcoming events in the US are bound to cause concern for the markets, we believe the debt ceiling is likely to be an issue that will resolve itself.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
