Blog : The Sequester and Penny Stocks

by Ed Zwirn on March 1st, 2013

One of the most disturbing aspects of the so-called sequestration debate raging in the U.S. Congress is the extent to which it not only highlights the sharp ideological divides at work in the country but also increases the kind of uncertainty which can bedevil even the best penny stock investments.

We Americans have the luxury of looking at other politically divided countries with an air of superiority. Having a stable form of government has enabled everybody from penny stock investors to welfare recipients to rest secure in the perception that, for all its flaws, the United States is better off than places like Syria and Egypt, where disagreement has escalated into real bloodshed, or Ukraine (a country I lived in for three years), where fistfights often break out in Parliament as opposition MPs and government lawmakers fight over policy.

I am not suggesting that the sharp debate over Federal government spending will escalate as sharply as have these debates, but rather bemoaning the fact that debates like these are giving partisan divisions per se a bad name and giving penny stock and other investors heartburn. 

As I write this blog on the morning of March 1, the president has until 11:59 p.m. to specify how he will execute $85 billion in spending cuts. In the absence of an unlikely agreement between Republican lawmakers and the White House, these cuts will take effect, having an uncertain (although certainly detrimental) effect on economic growth. Deciding which stocks to buy can be difficult enough without all this background noise.

This is particularly true in the very speculative realm of the penny stock. There is uncertainty enough in deciding which penny stocks can be worth your penny without having to wade through all this background noise. Even the best penny stocks are necessarily impacted by the direction of government policy: Will your penny stock picks go by the wayside as a result of continuing changes in government subsidies, spending choices and priorities? Even if your penny stock picks are not specifically dependent upon government policy, uncertainty is never a good thing. 

And, whatever you may think of the merits of the opposing arguments, investors - whether you are talking about penny stocks or blue chips - have good reason to dislike uncertainty. Any sound investment strategy must be predicated on a perception of where things are going, and the continual lurch from "fiscal cliff" to "debt ceiling" to "sequestration" provides anything but certainty.

As my colleague Peter Leeds rightly points out, penny stock investors need to keep an eye on developments like the Italian election, in which the heretofore unknown 5-Star movement stunned political observers and took a plurality in the popular vote. If career politicians brought us to this point, "what have the people to lose by trying something new?" is his accurate characterization of the sentiment felt by not only Italian voters. 

But, as bad as the current state of affairs may appear to us, this type of reasoning, as Peter correctly points out, can play out for the better or worse: The rise of the Nazi party in 1933 is perhaps the most frightening example of the latter.

Of course, the current political and economic mess in which the U.S. now finds itself is not likely to result in anything as dire as all that. But the lurch from crisis to crisis is not a healthy thing for the economy in general or for penny stocks in particular, even if the "crises" cited may be at least in part manufactured. The uncertainty disputes like this generate may not only cause difficulties for investors, but also bring popular disrepute to politicians and political parties. However much they may deserve this political disrepute, this is not a healthy trend, whether you are investing in penny stocks or just trying to make sense of it all.