The Government Shutdown – What’s An Investment Advisor to Do?

Arthur Stein Financial, LLC |
One challenge investment advisors face is framing a response to an unusual event. The government shutdown certainly ranks as an unusual event.
But the appropriate reaction isn’t obvious because it’s not clear how the shutdown will affect the economy or the market.
  • No one knows if this shutdown will be long-term or short-term.
  • Only parts of the government have been shuttered and, when they reopen, many of the negative effects may go away.
  • Outside events continue to affect the markets. For instance, Wednesday’s weak labor market report and the possibility of a default on government debt are bad news for stocks.
  • My clients invest in the stock market for the long term and the shutdown may not have long-term consequences.
Effects on the stock market are not obvious this morning. For example, the table below records the closing price for the S&P 500 Index for various dates within the last 12 months. The market was down for the two weeks before the shutdown began. On the first day of the shutdown, the S&P went up. On the second day, it was down slightly; one reason probably was the weak jobs report. Down again yesterday.
The net result: As of the close of business on Thursday, October 3, the S&P 500 was down 3.7% from its high on 18 September but was 17% higher than the beginning of the year.
Which time period is more relevant: The last two weeks or the last nine months? Or the last five or ten years?
An important issue for long-term investors is what happens when the shutdown ends. One opinion: An October 1 Bloomberg News article states that the shutdown “is a buying opportunity for stock investors . . . The Standard & Poor’s 500 Index has risen 11 percent on average in the 12 months following a government shutdown, according to data compiled by Bloomberg on the 12 instances since 1976. . . . In all the cases, the U.S. equity benchmark was higher by the end of the next two years.”
Of course, there could be negative effects, especially if the shutdown lasts a long time. These include potentially higher volatility for stock and bond prices, market declines and a reduction in economic activity.
A more significant event is the default on government debt that could happen in two weeks. That would be insane and hopefully won't happen. Because the effects of a default would be so catastrophic, I think even the most intransigent members of Congress will act to correct the situation.
I'm not a trader trying to generate profits by buying and selling short-term. My clients are long-term investors. We make changes to their portfolios as needed. Most of the changes are necessary because their financial situation has changed.

Occasionally, outside events do mandate a change in investment allocations. I’m not convinced that the federal shutdown is one of those events. The best strategy for a portfolio manager may be to do nothing at all.


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