Congressional Guns and Butter

Today’s market decline, in our view, reflects concerns over the discretionary spending cap increases of nearly $300 billion written into the two-year bi-partisan budget agreement.  The two-year spending cap increases would bring discretionary spending in fiscal year 19 to a level nearly 25% greater than the roughly $1.2 trillion of discretionary spending in fiscal year 17.  Of the total increase, approximately $165 billion goes to military spending. This will represent the biggest increase in defense spending since 2003—during the Iraq war.   Non-defense spending will increase $131 billion including $20 billion of new infrastructure spending.  Importantly, this measure suspends the debt ceiling for a year until March 1, 2019. The senate and house will vote on this package today—Thursday—in order to beat the midnight deadline for keeping the federal government open.

Congress’ Open Wallet Approach

Investor concerns reflect the open wallet approach this Congress adopted in its spending approach.  In fiscal year 17, the budget deficit reached $666 billion.   The tax reform bill will add approximately $1.5 trillion over ten years to that budget deficit.  This budget agreement further adds to the budget deficit and will likely bring the federal deficit to over $1 trillion in fiscal year 2019.  That deficit level represents the same level incurred coming out of the 2008 financial crisis.  Investors may understand such a substantial deficit after a financial crisis.  However, in a period of economic growth, it seems difficult to reconcile that growth with a trillion-dollar deficit.   As a reminder, Congress will still be considering a $1.5 trillion infrastructure spending package.  Simply put, Congress needs to do a fiscal exam of our federal government spending.

Investment conclusion

Concerns over unfettered federal government spending leads many investors to assume a higher probability of increasing long-term interest rates this year.   In our past commentaries, we looked to the second half of this year to be the key test period to determine whether the Fed’s increased Fed Funds rate and quantitative tightening programs would begin to bite.  Our view already assumed that interest rates, both short and long, would likely increase—more so in the second half of 2019.  This budget proposal would likely increase the probability of that occurring earlier and the interest rate curve steepening more than even our expectations.  In this likely financial environment, investors should look to continue to shorten the duration of their fixed income investments and also consider adding alternative investment products.

Andrew J. Melnick, CFA

Chief Investment Strategist

Any distribution, copying or disclosure of this content is prohibited. The contents of this post should not be construed as investment advice, unless explicitly stated. Further, this information is not intended as an offer or solicitation for the purchase or sale of any security. Neither data nor other information contained herein (or in the attachments) are warranted as to completeness or accuracy and are subject to change without notice. Any comments or statements made herein do not necessarily reflect the views of SkyView Investment Advisors LLC. It should be noted that internet communications are not secure and subject to possible data corruption, either accidentally or on purpose, and may contain viruses. Finally, to the extent that performance information is contained herein, past performance is not necessarily indicative of future returns.
First Capital Advisors Group, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. First Capital Advisors Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: First Capital Advisors Group, LLC 200 White Road, Suite 215, Little Silver, NJ 07739.  The information herein was obtained from various sources.  First Capital Advisors Group, LLC does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. First Capital Advisors Group, LLC assumes no obligation to update this information, or to advise on further developments relating to it.
This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
2/9/2018 9:40 am
« Previous     Next »