Some call it a "perfect storm" and others a "financial apocalypse," but it doesn't matter what you call the fiscal headwinds facing the U.S. economy – just that you watch them, and the stock market "crash talk" they're stirring up.
Despite a strong rise for the stock market so far in 2013, many of the structural and political concerns highlighted during periods of political convenience in Washington have not gone away. Every year it seems that Congress kicks the can down the road, only to act shocked when the economy stalls and the can is back at their feet.
Bottom line: This fall could turn out to be a volatile time for U.S. investors. As investors, if we can't change Washington today, we can prepare now for any stock market crash, correction, or volatility that these headwinds bring.
Here are the biggest four headwinds to keep your eyes on:
Stock Market Crash Triggers
- The Quantitative Easing (QE) Taper Talk Heats Up
Two months ago, U.S. Federal Reserve Chairman Ben Bernanke floated a plan to taper the $85 billion monthly bond program that has fueled a surge in the global economy. Now any hints from the Fed that a taper is near sends the market tumbling into triple-digit declines.
Without Bernanke's QE program to flood the markets with cheap money, there will be more market jitters – particularly in retail stocks. In fact, retailers are so desperate given the lackluster sales for the year already that some have already started holiday sales this month.
There has also been a strong pullback from investors in emerging markets.
The pullback has reduced investor risk for higher yields and led to a dramatic downturn in countries like Thailand, Indonesia, India, and Malaysia and a rise in volatility. But it's also sending ripples into Europe, particularly as U.S. interest rates are on the rise.
- Government Shutdowns and Debt Ceilings
Now that Congress has returned from August recess, it has to deal with two important elements: a budget to finance government and a looming debt ceiling deal that is expected to be just as political as ever.
Don't expect a simple agreement or continuing resolution to finance spending as an easy agreement.
Republicans are expected to demand tax reform and changes to Social Security and Medicare in return for hikes to government borrowing levels. Unfortunately, as the government blows past the $17 trillion threshold, it's clear that neither Republicans nor Democrats are prepared for the potential blowback that capping the borrowing limits could lead to.
We've been down this path before. In the event of a government shutdown, essential services would likely not continue, and government would default on certain debt payments. Though unlikely, as the Oct. 1st budget deadline approaches and talk in Washington heats up, ripples through the global economy could soon materialize.
Any defaults or another downgrade to U.S. bonds could spark significantly higher borrowing costs, a consequence that could have grave impacts on how companies are able to finance expansion and grow. In addition, it would affect Americans in every facet of their lives, from college to mortgage loans.
As for a stock market crash, the last debt ceiling battle in the summer of 2011 triggered a 15% drop in the S&P 500 from July to September.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.