Government Shutdown

Typically in early October the focus of the markets is on the start of earnings season.  This year is different for a very obvious reason, all of the focus is on the government shutdown. Here are some thoughts:

1)  It is important to understand that 17 times there have been government shutdowns since 1970, none of which did lasting damage to the stock market.  This does not mean that this time can’t be different if our “leaders” fail to reach an agreement, but it is to say that we have been here many times. The media and our politicians love to put out dire warnings and whip the public into a frenzy.  The media does this for ratings, the politicians for positioning.  In any case, here is a breakdown of the S&P 500 performance before, during and after government shutdowns:

If all of these numbers give you a headache here is my summary – One month after a government shutdown the market is generally slightly higher. In other words, past shutdowns have had a minimal impact on the economy.

2)  One of the best articles I have seen that addresses the impasse comes from Ron Fournier at the National Journal: 

“I am on record advocating two seemingly incongruous positions. First, President Obama can’t capitulate to GOP demands to unwind the Affordable Care Act. Second, his position against negotiating with Republicans is politically unsustainable.
Let me unpack both conclusions.”

To read the full article click here:  
http://bit.ly/17fVdeX

3)  From an investment perspective we are closely watching as events unfold.  The stock market pullback that occurred last December on concerns of the Fiscal Cliff deadline presented some great opportunities. Short-term market volatility should continue this time until an agreement is reached to reopen the government and extend the debt ceiling. However, there is one last key point that has limited the market fallout thus far.  Janet Yellen, who should have clear sailing to replace Ben Bernanke as the Head of the Federal Reserve, made it clear in September that the Fed is in no hurry to taper their $85 billion/month bond-buying program, a reversal of Ben Bernanke’s comments in June.  The Fed’s stimulus programs have been a major boost to the markets over the past four and a half years and the government shutdown will only embolden Ms. Yellen’s dovish stance.

The bottom line is that government shutdowns have occurred in the past and our political parties negotiated, came to an agreement and markets moved on.
Despite the current political rhetoric, an agreement is still the most likely outcome this time around, but we are prepared if this shutdown breaks with history.