More on the Government Shutdown
We’ve been receiving a fair amount of inquiries about the government shutdown and what it means for financial markets. It is our belief that the shutdown itself is not a major risk factor to financial markets unless it lasts far longer than the market currently expects (which is about three weeks). In each of the last six trading days (September 30th through October 7th) the S&P 500 has spent much of the day between 1680 and 1690, closing just above the high end three times and just below the low end twice. Intraday fluctuations revolve around the stridency of most recent comments from political leaders; conciliatory remarks spark gains, harsher ones push the market lower. One would expect the U.S. stock market to grind lower as long as the shutdown continues, because it would have a modestly negative impact on near term economic growth (theoretically it would have no impact on intermediate or long term growth).
The real risk to financial markets, both here and overseas, is a debt default. All kinds of negative consequences would result fairly immediately, and the impact of the increase in borrowing costs, even if the default was short-lived, could be felt for years. The government has some options to avoid default even if Congress cannot agree to lift the debt ceiling, but each of these may be problematic constitutionally. The strong belief in the markets right now is that this will not happen, but as each day goes by that belief is going to be put under increasing pressure.
The wisdom of getting more defensive in the face of this uncertainty is something we debate. If the market is correct and this is a short term (one or two week) matter, selling into fear just means you will ultimately buy back in at a higher price once the matter is settled. Not only is this likely, it is the only scenario that has ever occurred. Buying whenever Congress has gotten unusually dysfunctional has always eventually resulted in a gain once a deal was reached. Selling now is essentially betting on an outcome that is not only worse but longer lasting that we have seen. For this reason, it is our inclination to refrain from making portfolio changes based upon guessing what Congress will do. As long as the economy holds up, we will stay the course.
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